Tax Liability on Debentures

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Querist : Anonymous

Querist : Anonymous (Querist)

19 April 2010 What is the tax liability on premium earned on selling Secured Redeemable Optionally Convertible Debentures.
Thanks in advance!!

chetan soni

chetan soni (Expert)
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20 April 2010 yes, TDS is deductible for cab services. You need to see the limits of sec. 194C.

Querist : Anonymous

Querist : Anonymous (Querist)

20 April 2010 I understand TDS is deductible, but i wanted to know whether to treat the income from selling such convertible debentures for capital gain tax or club it with other income and pay tax according to the slab in which it falls?

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
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26 July 2025 Great question — the tax treatment of income from selling **Secured Redeemable Optionally Convertible Debentures (SROCDs)** can be nuanced, especially because these are **hybrid instruments** (debt + potential equity). Let's clarify how **capital gains vs. other income** applies.

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## 🔍 **Key Question**

**When you sell SROCDs and earn a premium, is it:**

* Capital Gains (taxed under capital gains rules)?
* Or Other Income (taxed at slab rates)?

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## ✅ **Answer: Taxed as Capital Gains**

### ✅ 1. **SROCDs are capital assets**

Under the **Income Tax Act**, debentures (including optionally convertible ones) are treated as **capital assets**. Therefore:

> 🔹 **Selling** the SROCD before conversion = **capital gains transaction**.

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## 🔹 Tax Depends on Holding Period:

| Holding Period | Type of Capital Gain | Tax Rate |
| ---------------------- | -------------------- | ------------------------------------ |
| > 12 months (listed) | **Long-Term** | 10% without indexation (Section 112) |
| ≤ 12 months (listed) | **Short-Term** | Taxed at slab rates |
| > 36 months (unlisted) | **Long-Term** | 20% with indexation |
| ≤ 36 months (unlisted) | **Short-Term** | Taxed at slab rates |

> 🔸 Most SROCDs are **unlisted**, so the **36-month** threshold applies.

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### 🚫 Do **not** club this income under “Income from Other Sources”

You only do that if you're getting **interest**, **dividends**, or **one-off gifts**, etc.
Selling a **capital asset** like a debenture falls squarely under **Capital Gains**.

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## 🔹 Special Note – On Conversion (if not sold)

If you **don’t sell** but instead **convert the debentures into equity shares**:

* No capital gain is triggered **at the time of conversion** (Section 47(x) – conversion is not treated as transfer).
* But later, when you **sell those equity shares**, the **capital gain is calculated** based on:

* Cost = price paid for debentures
* Holding period = counted **from date of conversion** (not date of debenture allotment)

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## ✅ Summary

| Event | Tax Treatment |
| ---------------------------------- | --------------------------------------------- |
| Sale of SROCD before conversion | ✅ **Capital Gains** (Short/Long Term) |
| Tax rate (if unlisted > 36 months) | ✅ LTCG @ 20% with indexation |
| Conversion into shares | ❌ Not taxed at conversion time |
| Sale after conversion | ✅ Capital Gains (based on date of conversion) |

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Let me know if you'd like help:

* Computing **capital gain on a real sale**
* Understanding how **indexation** works for long-term gains
* Drafting disclosures for ITR

I can also check if your specific SROCD is listed or unlisted, if you provide the company name.

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