TDS on Debenture Redumption Premium

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kalyan (Querist)

01 February 2011 Hello members,

Members are requested to kindly share their views on the characterization of redemption premium on Optionally Convertible debentures (OCD).

Case:

An individual made certain investments through Portfolio management scheme which in turn invested certain amount in Optionally Convertible debentures (OCD) of a company in India. Those OCD were redeemed by the company before conversion. The company has paid the redemption proceeds along with redemption premium. The company has considered the redemption premium as “interest” and has accordingly deducted TDS u/s 193 of the IT Act, 1961.

Please clarify whether the treatment given by the company is correct or not.

sagar

sagar (Expert)

02 February 2011 your question is whether redemption premium is in the nature of Interest?

My suggestion is yes it should be in the nature of interest. the difference between amount invested and maturity amount is the portion of your income and can be catagorised under Interest income.

the company can rightfully deduct tds on this

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kalyan

kalyan (Querist)

02 February 2011 Thank you.

CA PARAS BAFNA

CA PARAS BAFNA (Expert)

02 February 2011 The redemption premium paid by the company is treated by the company as an expenditure which is essentially to be incurred by it to stop future interest payments.

It can also be said that the company has discharged its loan liability by repaying it with an additional amount of interest and the same is in the "interest" of the business.

Hence the company has made its expenditure claim more sustainable in law by deducting TDS on such amount.

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