Budget brings listed bonds under TDS from April

Budget brings listed bonds under TDS from April

Most of the budget proposals this year brought cheer for taxpayers on many counts but bond investors had a reason to worry.

As announced in the budget, from April 1, listed bonds (debentures) will attract TDS, or tax deducted at source, of 10% on interest payments. This move is expected to plug the under-reporting of interest income by taxpayers.

Currently, under Section 193 of the Income Tax (I-T) Act, listed bonds are exempt from TDS. “Unlisted bonds are already subject to TDS under the I-T Act,” says Naveen Wadhwa, deputy general manager, Taxmann.

So, will TDS apply on interest payments from all bonds, irrespective of the issuer? No. Section 193 makes reference to “any security issued by a company”.

According to Rajeshree Sabnavis, founder, Rajeshree Sabnavis & Associates, a boutique tax firm, TDS will be applicable only in case of bonds issued by companies. Government bonds, including sovereign gold bonds, shall be exempt from the TDS provision.

Interest from bonds gets taxed at your relevant income tax slab rate. What happens if you fall under the tax-exempt category or are subject to a lower income tax rate (under 10%)? Can you submit Form 15G or Form 15H to ensure that no TDS is deducted on your interest income—similar to how you do for bank fixed

deposits? “The form has to be submitted to the entity responsible for paying the interest, which is the bond-issuing company,“ says Sabnavis.

Form 15G has to be submitted if you are under 60 years of age and Form 15H, if you are aged 60 or above. She further adds, “We have to wait for more details to see how this will work out for bondholders,” says Sabnavis.

Finally, note that while TDS does not impact your tax liability, it can impact your near-term cash flows. If you have been depending on interest income from bonds for your running expenses, you may have to make some adjustments to account for the amount deducted at source.