IV. LEGAL AND REGULATORY FRAMEWORK

Role of Regulators in India

  • The regulations in financial markets aim to safeguard consumer interests and ensure regulated development of financial markets for economic growth.
  • There are four regulators in India:
    • Reserve Bank of India (RBI): Regulates banking system and money markets.
    • Securities and Exchange Board of India (SEBI): Regulates securities markets.
    • Insurance Regulatory and Development Authority of India (IRDAI): Regulates insurance market.
    • Pension Fund Regulatory and Development Authority of India (PFRDA): Regulates pension market.
  • These regulators fall under the Ministry of Finance.

Role of Securities and Exchange Board of India (SEBI)

  • SEBI regulates securities markets, including mutual funds, depositories, custodians, and registrars and transfer agents (RTAs).
  • The Preamble of SEBI describes its functions as protecting investor interests and promoting the development and regulation of the securities market.
  • SEBI regulations focus on:
    • Disclosures by issuers of securities (companies and mutual funds)
    • Efficiency of transactions in securities markets
    • Low transaction costs
  • Other areas requiring regulations include:
    • Deliberate speculation in stock markets
    • Insider trading
    • Excessive risks taken by mutual funds
    • Inadequate collateral by issuers of debt securities
  • Unchecked activities can erode investor trust, leading to a lack of financial resources and reduced investment activity in capital markets, hampering economic growth.
RegulatorsFunctions
Reserve Bank of India (RBI)Regulates banking system and money markets
Securities and Exchange Board of India (SEBI)Regulates securities markets
Insurance Regulatory and Development Authority of India (IRDAI)Regulates insurance market
Pension Fund Regulatory and Development Authority of India (PFRDA)Regulates pension market

Regulatory reforms by SEBI

  • SEBI (Securities and Exchange Board of India) has implemented various regulatory reforms in the mutual fund industry to protect investor interests and promote informed investment decisions.
  • The reforms have been introduced through regulations, circulars, and guidelines, covering different aspects of mutual fund operations.
  • The regulatory provisions can be categorized as follows:
Regulation CategoriesAreas Covered
Scheme related documentsObjectives, content, and publication frequency of scheme-related documents
Conversion and consolidation of existing schemesMergers and consolidation of schemes to protect unitholder interests
New productsApproval and regulation of new product categories
Risk management systemGuidelines for robust operational risk management and exposure limits
Disclosures and reporting normsMandates for proper disclosures, reporting formats, and frequency
Governance normsGovernance requirements for funds and schemes, including committees and trustees
Secondary market activitiesRegulations for mutual fund activities in equity, debt, government securities, and derivatives markets
Net Asset Value (NAV)Disclosure, calculation, rounding-off, and time stamping of NAV
ValuationValuation norms for securities held by mutual fund schemes
Loads, fees, and expensesImposition and disclosure of limits on loads, fees, and expenses
Dividend distribution procedureProcedures and norms for distribution of dividends
Investment by schemesGuidelines and restrictions on investments by mutual fund schemes
AdvertisementsRegulations on content, clarity, accuracy, and fair representation of advertisements
Investor rights and obligationsRegulations regarding investor rights, account statements, penalties, and facilities
Certification and registration of intermediariesNorms for certification, registration, and continuous professional education of intermediaries
Transaction in mutual fund unitsGuidelines for transactions, preservation of documents, and KYC norms
Categorization of mutual fund schemesGuidelines for scheme categorization and consolidation, benchmarking, and performance disclosure
Segregated PortfolioProvision for creating segregated portfolios to protect unitholders in credit events and manage liquidity risk
  • SEBI’s Advertising Code for mutual funds ensures accurate, fair, and transparent advertisements, prohibiting false or misleading statements and exploitation of investor knowledge.
  • Mutual funds also need to comply with regulations issued by other regulators such as RBI (Reserve Bank of India) and stock exchanges.

Advertisement Guidelines for Mutual Funds

The advertisement guidelines for mutual funds provide clear instructions on disclosing performance-related information, celebrity endorsements, circulation of unauthenticated news, and investors’ rights and obligations. Here are the key points summarized in a table:

GuidelinesAreas Covered
Disclosing performance-related information– CAGR for different time periods
– Point-to-point returns for ease of understanding
– Differentiate between regular and direct plans
– Disclose if the fund manager has changed
– Performance data of other schemes managed by the same fund manager
– Disclosure for money market schemes and short-term investments
Celebrity endorsements at industry level– Promote awareness of mutual funds as a financial product category
– Limit expenses and obtain prior approval from SEBI
Guidelines for circulation of unauthenticated news– Implement internal code of conduct and controls
– Restrict access to blogs, chat forums, and messenger sites
– Maintain logs and seek approval from Compliance Officer
Investors’ rights and obligations– Right to beneficial ownership, change distributor, inspect documents, etc.
– Right to appoint nominees, pledge units, and seek grievance redressal
– Rights in the context of change in fundamental attributes and termination of AMC
– Right to unclaimed amounts and disclosure of portfolio details
– Treatment of proceeds from illiquid securities

Due Diligence Process by AMCs for Distributors of Mutual Funds

Asset Management Companies (AMCs) are responsible for regulating the practices of distributors of mutual funds. They conduct due diligence on distributors as per SEBI guidelines. Here are the key points summarized in a table:

Due Diligence Process by AMCs for Distributors of Mutual FundsOverview
PurposeRegulate practices of mutual fund distributors
ProcessConduct due diligence on distributors
Key Steps– Evaluate distributor’s background and experience
– Assess distributor’s infrastructure and systems
– Verify distributor’s compliance with regulations
– Review distributor’s track record and performance
Documentation– Collect distributor’s registration and compliance documents
– Review distributor’s financial statements and audit reports
Ongoing Monitoring– Regularly review distributor’s performance and conduct audits
– Take appropriate action for non-compliance or misconduct
SEBI CircularSEBI has issued a circular providing detailed guidelines

Note: The table summarizes the due diligence process conducted by AMCs for distributors of mutual funds, highlighting the purpose, process, key steps, documentation, ongoing monitoring, and reference to the SEBI circular.

Investor Grievance Redress Mechanism

In case of any issues with the AMC or mutual fund scheme, investors can follow the grievance redress mechanism. Here are the key points summarized in a table:

Investor Grievance Redress MechanismOverview
Initial ApproachContact investor service center for grievance redressal
Escalation ProcessIf the issue remains unresolved, escalate it to senior levels within the AMC
SEBI ComplaintIf the issue is not resolved even after escalation, file a complaint with SEBI
SEBI Complaint Redress SystemLodge, follow up, and track complaints online using the SCORES system
Physical Complaint SubmissionInvestors unfamiliar with SCORES can submit complaints physically at SEBI offices
Entities CoveredListed companies, registrar & transfer agents, brokers, mutual funds, and more

AMFI Code of Conduct for Intermediaries

The AMFI Code of Conduct for Intermediaries aims to maintain high ethical and professional standards in the mutual fund industry. Here are the key points summarized in a table:

AMFI Code of Conduct for IntermediariesOverview
ObjectivePromote investors’ interest by defining and maintaining ethical standards
Code of EthicsACE (AMFI Code of Ethics) sets out standards for AMCs in their operations
and dealings with investors, intermediaries, and the public
SEBI Regulation ComplianceAsset Management Companies and Trustees must abide by the Code of Conduct
specified in the Fifth Schedule of SEBI (Mutual Funds) Regulation, 1996
AMFI’s Supplemental CodeAMFI Code supplements SEBI’s Code to encourage higher standards for investors
AMFI Guidelines for IntermediariesAGNI (AMFI Guidelines & Norms for Intermediaries) for agents, brokers, etc.
selling mutual fund products
Breach of CodeIf an intermediary breaches the Code, AMFI initiates a sequence of steps
– Request explanation from the intermediary within 3 weeks
– Issue warning letter for subsequent violations
– Cancel registration upon proved second violation
Appeal ProcessIntermediaries have the right to appeal to AMFI

Chapter 3: Commodity Futures

Introduction to Futures: Futures contracts are legally binding agreements between a buyer and a seller to buy or sell a specified amount of an asset at a predetermined price on a specific date in the future. These contracts are traded on exchanges and are standardized in terms of size, quantity, grade, and time, ensuring consistent […]

Chapter 9: Income from other sources

Income from Other Sources

Income from other sources includes any income which is not exempt from tax and cannot be included under any other heads of income. It is chargeable to tax under the head ‘Income from Other Sources’.

Calculation of Income:
The following table shows the calculation of income taxable under this head:

Nature of Income Amount

  1. Dividend Income
  2. Winning from lotteries, etc.
  3. Employees’ contribution towards staff welfare scheme**
  4. Interest on securities**
  5. Rental income of machinery, plant or furniture**
  6. Composite rental income from letting out of plant, machinery, furniture and building**
  7. Sum received under Keyman insurance policy++
  8. Deemed Income of a closely held company
  9. Interest on compensation or enhanced compensation
  10. Advance money received in the course of negotiations for transfer of a capital asset which has been forfeited
  11. Deemed Income in certain cases
  12. Compensation on termination of employment or modification of terms of employment
  13. Any other income not taxable under any other head
    Less: Attributable expenses
    Total Income from Other Sources

** If such income is not chargeable to income-tax under the head “Profits and gains of business or profession”

++ If such income is not chargeable to income-tax under the head “Profits and gains of business or profession” or under the head “Salaries”

Income from Securities:
Income arising from securities chargeable to tax under this head includes:
a) Dividend income from securities held as an investment
b) Interest income from securities held as an investment
c) Deemed Income in certain cases specified under section 56(2)
d) Shares issued at premium by closely-held company

Interest on Securities-

Topic Interest on Securities
Taxability Taxable under ‘Income from Other Sources’
Meaning of Interest – Interest on Govt. or State Govt. securities
– Interest on debentures/other securities for money issued by local authorities, companies or corporations established by Central/State/Provincial Act
Meaning of Securities Bonds, Debentures/Debenture stock, Security receipts, Govt. securities
Basis of Charge – Computed according to the accounting method used by the assessee (mercantile or cash)
– If mercantile, ICDS-IV may apply
Exemption Some interest income is exempt under Section 10 of the Income-tax Act
Computation of Taxable Income Gross interest from securities minus permissible deductions (collection charges, interest on loan taken to purchase securities)
Applicability of TDS Tax is deducted under Section 193 of the Act; grossed up interest offered to tax depending on the rate at which tax was deducted at source
Taxability of Income Profit from sale of securities held as stock-in-trade is taxable under ‘Profits and Gains of Business or Profession’, while profit from sale of securities held as investment is taxable under ‘Capital Gains’
Conversion of Foreign Currency Income Income from securities earned in foreign currency is converted into Indian Rupees at SBI telegraphic transfer buying rate on the last day of the month preceding the month in which income is due; for TDS, conversion is done on the date of tax deduction

Rate of Tax-

Section Assessee Particulars Tax Rate
115A Non-resident or Foreign Co. Interest received from Government or an Indian concern on monies borrowed or debt incurred by such Government or Indian concern in foreign currency 20%
199 Non-resident or Foreign Co. Interest received from notified Infrastructure Debt Fund as referred to in Section 10(47) 5%
  Non-resident or Foreign Co. Interest received from an Indian Co. or business trust as specified in Section 194LC, i.e., interest in respect of monies borrowed by them in foreign currency or long-term infrastructure bonds or rupee denominated bonds. 4% if interest is payable in respect of long-term bond or rupee denominated bonds listed on a recognised stock exchange in IFSC otherwise 5%
  Non-resident or Foreign Co. Interest on rupee denominated bonds of an Indian Co. or Government Securities or municipal debt securities as referred to in Section 194LD 5%
  Non-resident or Foreign Co. Interest income distributed by business trust to its unit holders as referred to in Section 194LBA. 5%
115AC Non-resident Interest on bonds of an Indian Company or Public Sector Company (PSU) purchased in foreign currency 10%
115AD Foreign Institutional Investor Interest on rupee denominated bonds of an Indian Company or Government Securities or municipal debt securities 5%

Gift of Securities-

Here’s a table summarizing the information:

Topic Details
Gift of Securities  
Tax liability Chargeable to tax as income from other sources if received without consideration or for inadequate consideration than fair market value
Exemption No tax if aggregate difference between fair market value and consideration paid does not exceed Rs. 50,000
Movable property Includes shares and securities
Computation of income  
Without consideration Whole fair market value chargeable if aggregate fair market value exceeds Rs. 50,000
Inadequate consideration Difference between fair market value and consideration chargeable if aggregate difference exceeds Rs. 50,000
Computation of fair market value As per Rule 11UA of the Income-tax Rules, 1962
Cases when income is not chargeable to tax  
Specified event No tax if received on the occasion of marriage, under a will or by way of inheritance, or in contemplation of death of payer/donor
Status of donor/payer No tax if received from specified relative, local authority, fund/foundation/university/educational institution/hospital/medical institution/trust/institution referred to in Section 10(23C), or trust/institution registered under Section 12A/12AA/12AB, or individual by a trust created solely for the benefit of relative of the individual
Definition of relative Husband/wife, son/daughter, daughter-in-law/son-in-law, father/mother, mother-in-law, father-in-law, brother/sister (and their spouses), brother-in-law/sister-in-law (and their spouses), grandfather/grandmother, spouse’s grandfather/grandmother, grandson/granddaughter (and their spouses), great-grandson/great-granddaughter (and their spouses), great-grandfather/great-grandmother, and spouse’s great-grandfather/great-grandmother, father’s brother/sister, mother’s brother/sister
Not deemed as ‘relatives’ Step-brother/sister, nephew/niece, cousins
Transactions not regarded as transfer No tax if received under distribution of capital assets on partition of a HUF, transfer of capital asset by Indian holding company to its Indian wholly-owned subsidiary or vice versa (if conditions specified in Section 47(iv)/(v) are met), or transfer of capital asset in a scheme of amalgamation/demerger/business reorganization specified in various clauses of Section 47

Shares issued at Premium by closely-held Company:

Condition for taxability: Any excess premium received by a closely-held company from the issue of shares is chargeable to tax under income from other sources if the following conditions are satisfied: shares (equity or preference) are issued by a closely held company, the consideration for the issue of shares is received from a resident person, and the consideration received exceeds the face value and fair market value of shares. If these conditions are met, the consideration received exceeding the fair market value of the share shall be taxable in the hands of the issuer company.

Exceptions: The above provision shall not apply to tax any consideration received for the issue of shares if the consideration is received by a Venture Capital Undertaking from a Venture Capital Company or Venture Capital Fund or Category-I or Category-II Alternative Investment Fund (AIF), or if the company is an eligible start-up fulfilling conditions as prescribed in the Notification issued by the DPIIT.

Applicability of Income Computation and Disclosure Standards (ICDS):

The income taxable under the head ‘Profit and gains from business and profession’ and ‘Income from other sources’ shall be computed in accordance with the provisions of Section 56 to Section 59 and Income Computation and Disclosure Standards (ICDS). ICDS are not applicable to individual and HUFs that are not liable to audit under section 44AB. The Central Government has notified 10 ICDS which are applicable with effect from 01-04-2016. They are ICDS I: Accounting Policies, ICDS II: Valuation of inventories, ICDS III: Construction contracts, ICDS IV: Revenue Recognition, ICDS V: Tangible fixed assets, ICDS VI: Effects of change in Foreign exchange rates, ICDS VII: Government Grants, ICDS VIII: Securities, ICDS IX: Borrowing costs, and ICDS X: Provisions, Contingent liabilities and Contingent Assets.

Mock Tests-

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NISM-Series-X-B: Investment Adviser (Level 2) Certification

Chapter 9: Income from other Sources

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1. What type of assets are eligible for indexation benefit?

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2. What is the benefit of indexation in calculating capital gains?

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3. What is the formula for calculating the capital asset distributed on the liquidation of a company?

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4. In which case is the full value of consideration calculated differently?

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5. Calculate the capital gains for FY 2020-21 considering the given information.

Case Study- Mr. A purchased a house on 14th April, 2011 for Rs. 1 crore. He sold the said house in December 2020 for Rs. 3 crore. He now intends to purchase a new house for Rs.

1.5 crore. The Cost Inflation Index for financial year 2011-12 was 184 and Cost Inflation Index for FY 2020-21 was 30Answer the following questions:

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6. What is the definition of 'cost of improvement'?

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7. Which expenditure is excluded from the cost of improvement?

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8. Can Mr. A avail exemption under section 54 by investing in a new residential house?

Case Study- Mr. A purchased a house on 14th April, 2011 for Rs. 1 crore. He sold the said house in December 2020 for Rs. 3 crore. He now intends to purchase a new house for Rs.

1.5 crore. The Cost Inflation Index for financial year 2011-12 was 184 and Cost Inflation Index for FY 2020-21 was 30Answer the following questions:

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9. What is deducted from the full value of consideration in the case of unquoted shares transferred for less than their fair market value?

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10. How is the cost of acquisition converted into foreign currency?

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11. Which rate is used to convert the sales consideration into Indian Rupees?

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12. Which year's Cost Inflation Index (CII) is used when calculating the indexed cost of acquisition?

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13. What is the purpose of indexation in calculating capital gains?

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14. Which rate is used to convert capital gains earned in foreign currency into Indian Rupees for non-resident investors in Indian company shares or debentures?

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15. What is the conversion rate used for capital gains arising in foreign currency for resident or non-resident individuals?

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16. Which assets are not eligible for indexation benefit?

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17. What is the formula for calculating short-term capital gain or loss?

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18. How is the indexed cost of improvement calculated?

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19. If the required amount for investment in a new residential house is not invested by the return filing date, what should be done with the amount?

Case Study- Mr. A purchased a house on 14th April, 2011 for Rs. 1 crore. He sold the said house in December 2020 for Rs. 3 crore. He now intends to purchase a new house for Rs.

1.5 crore. The Cost Inflation Index for financial year 2011-12 was 184 and Cost Inflation Index for FY 2020-21 was 30Answer the following questions:

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20. What is the formula for calculating long-term capital gain or loss?

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21. Which provision applies to the computation of capital gains for reinvestment in shares or debentures of an Indian company?

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22. What rate is used to convert the expenditure in connection with transfer into Indian Rupees?

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23. What is deducted from the full value of consideration in the computation of long-term capital gains?

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24. How are the capital gains computed in foreign currency converted into Indian Rupees?

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25. When does the conversion of income earned in foreign currency into Indian Rupees take place?

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26. What is the formula for calculating the capital gains when the consideration for transfer is not ascertainable?

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27. Does the benefit of indexation apply when converting the cost of acquisition in foreign currency?

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28. When should the cost of improvement incurred before 01-04-2001 be considered?

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29. How is the "full value of consideration" defined in the computation of capital gains?

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30. How is the indexed cost of acquisition calculated?

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31. Which date is considered for the conversion of capital gains from a plot of land situated in Dubai to Indian Rupees?

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32. What is the time limit within which the new residential house should be acquired or constructed for the exemption to be available under section 54?

Case Study- Mr. A purchased a house on 14th April, 2011 for Rs. 1 crore. He sold the said house in December 2020 for Rs. 3 crore. He now intends to purchase a new house for Rs.

1.5 crore. The Cost Inflation Index for financial year 2011-12 was 184 and Cost Inflation Index for FY 2020-21 was 30Answer the following questions:

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Chapter 10: Taxation of Debt Products

Debt instruments are used by many entities to raise funds from the market. Debt instruments are similar to giving a loan to the issuing entity by the investor. The person holding the debt instrument of an entity would not hold any voting power or dividend claim. However, he is entitled to receive interest and redemption value at the time of maturity from the entity.

Sources of Income from Debt Products:

  • Periodic income earned from debt instruments is classified as interest income.
  • The gain or loss arising from transfer or redemption of debt instruments is classified as capital gains and taxed as such.

Interest income:

  • The income in the nature of interest on securities is taxable under the head ‘income from other sources’ if it’s not taxable under the head business income.
  • Two methods of accounting are allowed under the Income-tax Act, namely, the mercantile system and cash system, whichever is regularly employed by the assessee.
  • If the assessee follows the mercantile system of accounting, interest on securities is taxable on an accrual basis. If he follows the cash system of accounting, it is taxable on a receipt basis.
  • The taxable income in the nature of interest on securities is calculated by deducting permissible deductions (like collection charges, interest on loans taken to debt purchase securities) from gross interest from securities.

Capital gains:

  • Gain or loss arising from transfer or redemption of any security including debt securities is chargeable to tax under the head capital gain if the same is held by the assessee as a capital asset, that is, as an investment.
  • Securities held by foreign portfolio investors (FPIs) are always treated as a capital asset.
  • Tax on capital gain depends upon many factors such as nature of security, the period of holding, residential status of the assessee, etc.
  • Certain types of transfer from the scope and meaning of the word ‘transfer’ in relation to a capital asset are excluded from capital gain.

Types of Debt Products-

Coupon Bonds-

Types of Debt Products Coupon Bonds
Definition Bonds issued and redeemed at face value, with interest paid to investors over the tenure of the bond. Key features include maturity, coupon, and principal.
Coupon Bonds Bonds with a coupon rate, where lenders are entitled to periodic interest payments.
Market Value Determined by computing the present value of all future cash flows, using the yield-to-maturity.
Tax on Interest Interest from bonds is taxable under the head other sources and is generally taxed at a normal rate. Deductions are allowed for expenses laid out or expended to earn interest income, and commissions paid to realize such interest.
Concessional Rates Some cases offer concessional tax rates, including interest received from the government or Indian concern on foreign currency, Infrastructure Debt Funds, long-term infrastructure bonds, and more.

Zero-Coupon Bonds and Deep Discount Bonds-

Topic Zero Coupon Bonds Deep Discount Bonds
Description Do not carry any coupon or interest Issued at a steep discount to face value
Issuer Various entities Public financial institutions (e.g. SIDBI, IDBI, ICICI)
Redemption Redeemed at face value at maturity Redeemed at face value at maturity
Taxation Profit or gain on redemption is taxable as long-term capital gain if held for more than 12 months Long-term capital gain taxed at 10% without indexation
Benefit Capital gains arise from the difference between issue price and face value High return potential due to low issue price
Risks Fluctuation in interest rates affects bond prices Credit risk of the issuer
Examples Treasury bills, savings bonds Infrastructure bonds, government bonds

Convertible Bonds-

Topic Convertible Bonds
Definition A type of bond that allows the bondholder to convert their bonds into equity shares of the issuing corporation on pre-specified terms.
Conversion Ratio Refers to the number of equity shares issued in exchange for the bond being converted.
Conversion Price The resulting price when the conversion ratio is applied to the value of the bond at the time of conversion.
Fully Convertible Bonds Bonds that are fully redeemed on the date of conversion.
Partially Convertible Bonds Bonds that are redeemed in part, and equity shares are issued in the pre-specified conversion ratio. The non-convertible portion continues to remain as a bond.
Taxability Any conversion of bonds into shares or any other asset is considered an “exchange” and falls under the definition of transfer, subject to capital gain tax. However, conversion of bonds into shares or debentures of the company is not considered a transfer under Section 47 of the Income-tax Act.
Section 47 Transactions relating to the conversion of securities that are not treated as a transfer. Includes conversion of bonds into shares, and conversion of foreign currency exchange bonds issued to non-residents by Indian companies.
Cost of Acquisition When a person subsequently sells shares or debentures acquired through conversion of bonds, the cost of acquisition shall be the same as that of the bonds, and the period of holding shall be reckoned from the date of acquisition of the bonds.

Commercial Paper-

Aspect Details
Definition Unsecured money market instrument in the form of a promissory note
Introduction in India 1990
Purpose To diversify short-term borrowings for highly rated corporate borrowers and provide an additional investment instrument
Issuers Corporate and financial institutions
Investors Individuals, banking companies, corporates, non-corporates, NRIs, FPIs (within SEBI limits)
Maturity Period Minimum 7 days, maximum 1 year
Trading Actively traded in the OTC market
Taxability of Difference between Face Value and Issue Price Treated as ‘discount allowed’, not as ‘interest paid’, hence not taxable as interest income.
Taxability for Non-Resident Investors Tax to be deducted at the rate of 30% for non-resident payees and 40% for foreign company payees as per Section 195 of Income-tax Act
Taxability of Capital Gains Any gain arising on transfer/redemption of commercial papers is taxable as short-term capital gain, applicable tax rates for residents and non-resident persons, and foreign companies. FPIs will be taxed at a flat rate of 30% under Section 115AD.

Government Securities-

Government Securities Description
Definition A tradable instrument issued by Central or State Government to acknowledge the Government’s debt obligation.
Short-term Securities Treasury bills or Cash Management bills with a maturity of less than 1 year.
Long-term Securities Government bonds or Dated Securities with a maturity of 1 year or more.
State Development Loans (SDLs) Bonds issued by State Governments with a maturity of 1 year or more.
Safety of Investment G-Secs are considered as the safest investment instrument as they carry practically no risk of default.
Dematerialized Account Investors can hold G-Secs in a dematerialized account with a depository (NSDL/CDSL).
Types of Government Securities G-Secs are available in a wide range of maturities ranging from less than 91 days to as long as 40 years.
Cash Management Bills (CMBs) Highly flexible bills with a maturity period usually less than 91 days.
Treasury Bills (T-Bills) Short-term debt instruments issued in 3 tenors- 91 days, 182 days, and 364 days.
Dated Government Securities Bonds issued by the RBI on behalf of the Government with a fixed or floating coupon paid on a half-yearly basis.
Taxation of Cash Management Bills and T-Bills No interest to investors. Profit on redemption or transfer considered as a short-term capital gain. Tax rate is applicable in case of an assessee. Tax for foreign portfolio investors is charged at a rate of 30%.
Taxation of Dated G-Secs and SDLs Taxability is the same as in the case of bonds. No tax is required to be deducted from the payment of interest to a resident person in respect of securities of Central Government or State Government except in the case of 8% Savings (Taxable) Bonds, 2003 and 7.75% Savings (Taxable) Bonds, 2018. Tax on interest paid in respect of these bonds is required to be deducted by the payer only when the amount of interest paid during the year exceeds Rs. 10,000.

Tax-Free Bonds-

Topic Tax Free Bonds
Definition Bonds that provide tax-free income to investors
Taxability of Income Interest paid on these bonds is tax-free in the hands of the investor
Exemptions Section 10 of the Income-tax Act provides various exemptions for the income earned from bonds issued by various organizations
Taxability of Capital Gains Same as coupon bonds (Refer Section 10.2.1)

Mutual Funds:

  • Collect money from investors and invest in the capital market
  • Invest in a variety of instruments such as equity, debt, bonds, etc.

Types of Mutual Funds:

Type Description
Equity Oriented Funds Invest mainly in shares of companies, allowing investors to participate in the equity market. High risk, but potential for high returns in the long run.
Debt Oriented Funds Invest in debt securities or interest-bearing instruments like government securities, bonds, debentures, etc. Provides low return but considered safe for investment compared to equity funds.
Money Market Funds Invest in liquid instruments such as Treasury Bills and Commercial Papers, having high liquidity. Suitable for conservative investors who want to invest surplus funds for a short-term for a reasonable return.
Balanced or Hybrid Funds Invest in all kinds of assets – equity, debt, and money market instruments. Some invest the majority in equity and the lesser in debt, while some opt for the other way around based on their needs for return and risk appetite.

Taxation of Income from Mutual Funds (Debt-Oriented)

Type of Income Tax Treatment
Dividend Taxable as per applicable tax rates for resident unit-holders. Deduction allowed for interest expenditure up to 20% of total income. No deduction allowed for other expenses.
Long-Term Capital Gains Taxable at 20% plus surcharge and cess after taking benefit of indexation for units held for more than 36 months. Non-residents are taxed at 20% plus surcharge and cess without indexation benefit.
Short-Term Capital Gains Taxable as per applicable rates for the assessee.

In this example, Mr. A acquired 1,000 units of a debt-oriented mutual fund at Rs. 150 per unit on 01-01-2016 and sold them on 15-03-2020 at Rs. 300 per unit. The period of holding is more than 36 months, so the nature of capital gain is long-term capital gain.

To calculate the capital gain, we need to determine the Full Value of Consideration, which is calculated as follows:

Full Value of Consideration = Number of units sold x Sale price per unit
= 1,000 x 300
= Rs. 300,000

Next, we need to calculate the Indexed Cost of Acquisition. The cost of acquisition of capital asset is Rs. 150 per unit, so the total cost of acquisition is Rs. 1,50,000.

The CII for the financial year 2015-16 is 254 and for the financial year 2019-20 is 289. Therefore, the indexed cost of acquisition is calculated as follows:

Indexed Cost of Acquisition = Cost of Acquisition x CII of the year of transfer / CII of the year of acquisition
= 1,50,000 x 289 / 254
= Rs. 1,70,669

Long-term capital gain is calculated by subtracting the indexed cost of acquisition from the full value of consideration:

Long-term capital gain = Full Value of Consideration – Indexed Cost of Acquisition
= Rs. 3,00,000 – Rs. 1,70,669
= Rs. 1,29,331

The tax rate on long-term capital gain is 20%, so the tax liability of Mr. A will be Rs. 25,866.2 (20% of Rs. 1,29,331).

Masala Bonds

  • Masala Bonds are Rupee Denominated Bonds (RDBs) issued to overseas investors but linked to the Indian currency.
  • The name “Masala” reflects the spiciness and culture of India.
  • They protect Indian companies from currency risk and transfer the risk of currency fluctuation to investors buying these bonds.
  • Any corporate or body corporate is eligible to issue RDBs overseas, including Real Estate Investment Trusts (REITs), Infrastructure Investment Trusts (InvITs), and banks.
  • The borrowing procedure for RDBs follows the same guidelines as for External Commercial Borrowings (ECBs).
  • Interest on Masala Bonds is taxable at concessional rates depending on the assessee and the type of bond.
  • Long-term capital gains arising from transfer or redemption of Masala Bonds are taxable at the same rate as coupon bonds, with some exceptions.
  • Short-term capital gains are taxable at normal rates for most assessee but at a flat rate of 30% for Foreign Portfolio Investors (FPIs).
  • Certain transactions, such as transfer of RDBs between non-residents outside India or on a recognized stock exchange in an International Financial Services Centre (IFSC), are not regarded as transfers.

Foreign Currency Convertible Bonds (FCCBs)

Foreign Currency Convertible Bonds (FCCBs) are equity-linked debt securities issued by corporate entities, international agencies, or sovereign states in a freely convertible foreign currency. Investors can convert them into shares or depository receipts according to a predetermined formula or exchange rate, or they can choose to retain the bond.

FCCBs offer lower interest costs to the issuer than similar non-convertible debt instruments due to their convertibility nature. They are also freely tradable, like Global Depository Receipts (GDRs), and the issuer has no control over the transfer mechanism.

FCCBs are an approved instrument for accessing external commercial borrowings (ECBs), and the terms and conditions applicable to ECBs also apply to convertible bonds.

Interest on FCCBs is taxable at the same rate as coupon bonds, but non-residents’ interest on FCCBs issued by an Indian or Public Sector Company is subject to a concessional tax rate of 10% under Section 115AC of the Income-tax Act, 1961. No deductions are allowed from such interest income, including those under Sections 80C to 80U.

Taxability of capital gains arising from the transfer of FCCBs is the same as for coupon bonds, but long-term capital gains on FCCBs issued by an Indian or Public Sector Company are taxable at a rate of 10% for non-residents under Section 115AC of the Income-tax Act, 1961.

Transfers of FCCBs of an Indian company by a non-resident to another non-resident outside India are not treated as transfers if the bonds were purchased in foreign currency under a scheme approved by the Central Government. Transfer of FCCBs on a recognized stock exchange located in any International Financial Services Centre is also not considered a transfer provided the consideration is paid or payable in foreign currency.

Financial Securities-

Financial securities are instruments that represent ownership or creditorship in a financial asset, such as stocks, bonds, and options. One type of financial security is Pass-Through Certificates or Securitised Debt Instruments. These are debt securities that are created from a select pool of assets, such as debt or receivables of an enterprise. The process involves pooling together a large number of loans given by an enterprise and transferring the proceeds arising from these loans to the holder of securitized debt instruments.

This process is carried out by a Special Purpose Vehicle (SPV), which acquires the debt or receivables from the originator, or the entity that holds the assets. The SPV then issues securities backed by the debt or receivables, which are called Pass-Through Certificates. The income from the debt or receivables is transferred by the SPV to the security holder. If the debt or receivables are secured by a mortgage, the securities issued by the SPV are also called Mortgage-Backed Securities or Asset-Backed Securities.

The public offer and listing of these instruments are regulated by SEBI through the SEBI (Issue and Listing of Securitised Debt Instruments and Security Receipts) Regulations, 2008. Important terms to understand this process include Originator, Asset Pool, Securitisation, Special Purpose Distinct Entity (SPV), and Investor, all of which are defined in the regulations.

Here is a table summarizing the key terms:

Term Definition
Originator The entity that assigns debt or receivables to an SPV for securitization
Asset Pool The total debt or receivables assigned to an SPV in which investors have a beneficial interest
The acquisition of debt or receivables by an SPV for issuance of securitized debt instruments to investors Any person holding securitized debt instruments that acknowledge their interest in the assigned debt
Special Purpose Distinct Entity (SPV) A trust that acquires debt or receivables and issues securitised debt instruments
Investor A trust that acquires debt or receivables and issues securitized debt instruments

SARFAESI Act and Security Receipts:

  • Security Receipts are receipts or securities issued by a trust set up by an Asset Reconstruction Company to any Qualified Buyer, evidencing the purchase or acquisition by the holder thereof, of an undivided right, title or interest in the financial asset involved in securitization.
  • Asset Reconstruction Companies (ARCs) are created to manage and recover Non-performing Assets (NPAs) of Banks and Financial Institutions. Essentially, ARC functions as a specialized financial entity which isolates NPAs from the balance sheets of Bank/financial institutions and facilitates the later to concentrate on normal banking activities.
  • Banks and financial institutions sell a large proportion of their bad loans or NPAs to ARCs, which recover them through attachment, liquidation, etc. ARCs can acquire the NPAs or bad loans of financial institutions or banks on their own account or through the issuance of Security Receipts to Qualified Institutional Buyers. This whole process is called ‘securitisation’ whereby loans of banks and financial institutions are converted into marketable securities through the issuance of security receipts.
  • SARFAESI Act provides a legal framework for the securitization of financial assets and asset reconstruction, and the security receipts issued by ARCs are included in the definition of ‘securities’ under the Securities Contracts (Regulation) Act, 1956.
  • Taxability of Securitized Debt Instruments and Security Receipts are governed by Section 115TCA read with Section 10(23DA) of the Income-tax Act whereby pass-through status has been provided to securitization trusts, that is, SPVs or trusts set up by ARCs. Thus, income arising to securitization trust is exempt from tax under section 10(23DA), while income accrued or received from the securitisation trust from activity of securitization shall be taxable in the hands of the investor under section 115TCA.

Non-Resident Taxation:

  • Non-residents are generally exposed to double taxation due to tax liability in two or more countries.
  • Countries have entered into Double Taxation Avoidance Agreements (DTAAs) with other countries to avoid double taxation of non-residents.
  • The tax rate for non-residents may differ from that of residents, for example, dividends on shares are taxed at a higher rate for non-residents.
  • To claim any relief under DTAAs, the non-resident will be required to obtain a Tax Residency Certificate (TRC) of the country of its residence.
  • Non-resident Indian citizens or Persons of Indian Origin have an option to avail the provisions of chapter XII-A of the Income Tax Act which provide concessional rates of tax.
  • Finance Act 2021 has introduced amendments to address the mismatch in taxation of income from notified overseas retirement fund.

Mock Tests-

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NISM-Series-X-B: Investment Adviser (Level 2) Certification

Chapter 10: Taxation of Debt Products- 1

1 / 50

1. What are Asset Reconstruction Companies (ARCs) primarily created for?

2 / 50

2. What is the tax rate applicable to long-term capital gains arising from the redemption of Masala Bonds by non-residents due to appreciation of rupee against a foreign currency?

3 / 50

3. Which regulatory body regulates the public offer and listing of Securitised Debt Instruments?

4 / 50

4. The total debt or receivables assigned to a special purpose distinct entity is called:

5 / 50

5. When is the income accrued or arising to a securitization trust deemed to have been credited to investors?

6 / 50

6. What is the effective date of the amendment related to overseas retirement funds introduced in the Finance Act 2021?

7 / 50

7. The entity that holds the assets and sells them to a Special Purpose Vehicle is called:

8 / 50

8. 1Pass-Through Certificates are included in the definition of 'Securities' under which act?

9 / 50

9. Under what circumstances is the transfer of Rupee Denominated Bonds not regarded as a transfer for tax purposes?

10 / 50

10. What is the rate of tax deduction for income distributed to an individual or HUF investor?

11 / 50

11. What is the tax rate applicable to dividends from shares for non-resident individuals?

12 / 50

12. What was the purpose of the amendment introduced in the Finance Act 2021 regarding overseas retirement funds?

13 / 50

13. Who is defined as any person holding any securitised debt instrument?

14 / 50

14. In which situation can a non-resident individual be exposed to double taxation?

15 / 50

15. How are coupon payments and redemptions settled in Masala Bonds?

16 / 50

16. Pass-Through Certificates are also known as:

17 / 50

17. What is the consequence if a non-resident individual transfers the eligible investments under Chapter XII-A within three years from the date of acquisition?

18 / 50

18. According to the notification issued by CBDT, is tax deductible on payments to a securitization trust?

19 / 50

19. Pass-Through Certificates are created from a pool of:

20 / 50

20. Which factors determine the tax rate applicable to a non-resident individual's income under DTAAs?

21 / 50

21. Which act provides a legal framework for the securitization of financial assets and asset reconstruction?

22 / 50

22. What is the purpose of Double Taxation Avoidance Agreements (DTAAs)?

23 / 50

23. What is the definition of 'Asset Reconstruction' under the SARFAESI Act?

24 / 50

24. 1Which act governs the setup of trusts by the National Housing Bank and NABARD?

25 / 50

25. How is the income accrued or received from a securitization trust taxed in the hands of the investor?

26 / 50

26. What is the eligibility criterion for availing the provisions of Chapter XII-A of the Income Tax Act?

27 / 50

27. According to the India-USA DTAA, what is the tax rate applicable to interest income earned by Mr. A?

28 / 50

28. Which entity transfers the income from debt or receivables to the security holders?

29 / 50

29. In which form should the securitization trust furnish a statement to the Income-tax department?

30 / 50

30. 1Which regulations regulate the public offer and listing of Securitised Debt Instruments?

31 / 50

31. What is the rate of tax deduction for income distributed to a non-resident or foreign company investor?

32 / 50

32. How do ARCs recover NPAs or bad loans?

33 / 50

33. Can a non-resident individual continue to be governed by the provisions of Chapter XII-A after becoming a resident in India?

34 / 50

34. What is the tax rate for long-term capital gains under Chapter XII-A of the Income Tax Act?

35 / 50

35. Who is defined as the 'Originator' in the context of securitization or asset reconstruction?

36 / 50

36. What is the definition of 'Qualified Buyer' in the context of security receipts?

37 / 50

37. Which regulations regulate the public offer and listing of security receipts?

38 / 50

38. What is the definition of 'Security Receipt' under the SARFAESI Act?

39 / 50

39. Under which section of the Income-tax Act is the securitization trust liable to deduct tax?

40 / 50

40. Is indexation benefit available for investments under Chapter XII-A of the Income Tax Act?

41 / 50

41. Which regulatory body regulates Asset Reconstruction Companies (ARCs)?

42 / 50

42. The process of acquiring debt or receivables by a special purpose distinct entity is called:

43 / 50

43. In which form should the securitization trust furnish a statement to the investors regarding income paid?

44 / 50

44. What is the tax rate applicable to short-term capital gains from the transfer of Masala Bonds by Foreign Portfolio Investors (FPIs)?

45 / 50

45. What does SPV stand for?

46 / 50

46. What are the eligible investments under Chapter XII-A of the Income Tax Act?

47 / 50

47. Which term defines the assignor of debt or receivables to a special purpose distinct entity?

48 / 50

48. Under which section of the Income-tax Act, the income arising to a securitization trust is exempt from tax?

49 / 50

49. What is the tax rate applicable to interest payable on Rupee Denominated Bonds issued by an Indian company or REITs/InvITs to non-resident or foreign companies?

50 / 50

50. Security receipts issued by ARCs are included in the definition of 'securities' under which act?

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NISM-Series-X-B: Investment Adviser (Level 2) Certification

Chapter 10: Taxation of Debt Products - 2

1 / 50

1. What is the tax rate on the gain from commercial papers for an FPI?

2 / 50

2. What is the period of holding for shares obtained through the conversion of bonds?

3 / 50

3. How is the tax deducted on commercial papers in the case of non-resident payees?

4 / 50

4. Which type of Mutual Fund invests in all kinds of assets, including equity, debt, and money market instruments?

5 / 50

5. What is the tax implication if Securities Transaction Tax (STT) was paid at the time of share transfer?

6 / 50

6. What is the tax rate on the gain from commercial papers for a resident person?

7 / 50

7. What is the borrowing procedure for issuing RDBs (Rupee Denominated Bonds)?

8 / 50

8. Can an Offshore Fund claim deductions under Chapter VIA for income received in respect of units purchased in foreign currency?

9 / 50

9. Are taxes deducted from interest payments on government securities?

10 / 50

10. How is the cost of acquisition determined for shares or debentures obtained through the conversion of bonds?

11 / 50

11. What is the conversion ratio in a convertible bond?

12 / 50

12. Are foreign currency exchange bonds (FCEsubject to capital gain tax on conversion into shares?

13 / 50

13. What is the maximum maturity period of commercial papers?

14 / 50

14. How is income distributed by mutual funds to a resident unit-holder taxed?

15 / 50

15. What is the tax rate on income received by an Offshore Fund in respect of units purchased in foreign currency?

16 / 50

16. Which type of government security offers a fixed or floating coupon?

17 / 50

17. How is profit arising from the redemption or sale of units of a mutual fund referred to?

18 / 50

18. What is the tax treatment for cash management bills and treasury bills?

19 / 50

19. What is the tax rate on the long-term capital gain in excess of Rs. 100,000?

20 / 50

20. What is the difference between treasury bills and dated government securities?

21 / 50

21. How is the tax treatment for the conversion of bonds into shares or debentures?

22 / 50

22. When is tax required to be deducted from interest paid on 8% Savings (Taxable) Bonds, 2003 and 7.75% Savings (Taxable) Bonds, 2018?

23 / 50

23. What are the default tax rates for short-term capital gains from the transfer of Zero Coupon Bonds?

"Example 6: ABC Ltallotted 400 Zero Coupon Bonds of face value of Rs. 1,000 each to Mr. X on 01-04-2020. The Bonds were issued to Mr. X at a discounted price of Rs. 400 per bonThe bonds are redeemable in March, 2030. However, Mr X transfers such bonds to

Mr. Y on 25-03-2021 for Rs. 500 each. Compute the capital gain chargeable in the hands of Mr. X."

24 / 50

24. What happens in a fully convertible bond?

25 / 50

25. What is the conversion price in a convertible bond?

26 / 50

26. Who can invest in commercial papers?

27 / 50

27. What are the tax implications when bonds are converted into shares of the company?

28 / 50

28. How is the interest on dated government securities and state development loans (SDLs) taxed?

29 / 50

29. Who is eligible to issue Rupee Denominated Bonds overseas as per RBI guidelines?

30 / 50

30. What are government securities (G-Secs)?

31 / 50

31. Which type of Mutual Fund is considered safe for investment compared to equity funds?

32 / 50

32. What is a commercial paper (CP)?

33 / 50

33. How is the difference between the face value and issue price of commercial papers taxed?

34 / 50

34. What are Mutual Funds?

35 / 50

35. Can an investor claim a deduction for interest expenditure incurred to earn income from mutual funds?

36 / 50

36. In the given example, what is the taxable amount for Mr. A if he holds the commercial papers till maturity?

Example : XYZ Ltissued commercial papers having face value of Rs. 50 lakh to Mr. A for Rs. 47 lakh on 01-07-2020. The commercial papers are redeemable at face value on 31-03- 202Discuss the tax implication in hands of Mr. A if he holds such commercial papers till maturity.

37 / 50

37. How are cash management bills (CMBs) issued?

38 / 50

38. Which section of the Income-tax Act specifies that conversion of bonds into shares is not treated as a transfer?

39 / 50

39. What is the purpose of issuing Masala Bonds?

40 / 50

40. How is the cost of acquisition determined for shares obtained through the conversion of bonds?

41 / 50

41. What are Masala Bonds?

42 / 50

42. How are commercial papers issued?

43 / 50

43. What is the period of holding for shares or debentures obtained through the conversion of bonds?

44 / 50

44. What is a convertible bond?

45 / 50

45. Which type of Mutual Fund invests in liquid instruments with high liquidity?

46 / 50

46. Which type of Mutual Fund invests primarily in shares of companies?

47 / 50

47. How is the gain or loss calculated for commercial papers held till maturity?

48 / 50

48. Which organization first issued Masala Bonds in London to increase foreign investment in India?

49 / 50

49. What is the tax rate for foreign portfolio investors (FPIs) on cash management bills and treasury bills?

50 / 50

50. What types of securities conversion are excluded from the scope of transfer under Section 47?

Your score is

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NISM-Series-X-B: Investment Adviser (Level 2) Certification

Chapter 10: Taxation of Debt Products - 3

1 / 37

1. How much is the short-term capital gain in Example 6?

"Example 6: ABC Ltallotted 400 Zero Coupon Bonds of face value of Rs. 1,000 each to Mr. X on 01-04-2020. The Bonds were issued to Mr. X at a discounted price of Rs. 400 per bonThe bonds are redeemable in March, 2030. However, Mr X transfers such bonds to

Mr. Y on 25-03-2021 for Rs. 500 each. Compute the capital gain chargeable in the hands of Mr. X."

2 / 37

2. What is the tax rate on long-term capital gain from Zero Coupon Bonds or Deep Discount Bonds without indexation benefit?

3 / 37

3. How is interest income on securities taxed?

4 / 37

4. How is the market value of a bond determined?

5 / 37

5. How is interest on securities taxed under the mercantile system of accounting?

6 / 37

6. Which rate is applicable for short-term capital gain from the transfer or redemption of Zero-Coupon Bonds for Foreign Portfolio Investors (FPIs)?

7 / 37

7. How is gain or loss from the transfer of securities taxed?

8 / 37

8. Is the transfer of Zero Coupon Bonds subject to indexation benefit in Example 6?

"Example 6: ABC Ltallotted 400 Zero Coupon Bonds of face value of Rs. 1,000 each to Mr. X on 01-04-2020. The Bonds were issued to Mr. X at a discounted price of Rs. 400 per bonThe bonds are redeemable in March, 2030. However, Mr X transfers such bonds to

Mr. Y on 25-03-2021 for Rs. 500 each. Compute the capital gain chargeable in the hands of Mr. X."

9 / 37

9. What are debt instruments used for?

10 / 37

10. How is the period of holding determined for treating capital gain as long-term?

11 / 37

11. In the given example, what is the period of holding for the Zero Coupon Bonds?

"Example 6: ABC Ltallotted 400 Zero Coupon Bonds of face value of Rs. 1,000 each to Mr. X on 01-04-2020. The Bonds were issued to Mr. X at a discounted price of Rs. 400 per bonThe bonds are redeemable in March, 2030. However, Mr X transfers such bonds to

Mr. Y on 25-03-2021 for Rs. 500 each. Compute the capital gain chargeable in the hands of Mr. X."

12 / 37

12. Under which head of income is interest income exempted?

13 / 37

13. What is the cost of acquisition in Example 6?

"Example 6: ABC Ltallotted 400 Zero Coupon Bonds of face value of Rs. 1,000 each to Mr. X on 01-04-2020. The Bonds were issued to Mr. X at a discounted price of Rs. 400 per bonThe bonds are redeemable in March, 2030. However, Mr X transfers such bonds to

Mr. Y on 25-03-2021 for Rs. 500 each. Compute the capital gain chargeable in the hands of Mr. X."

14 / 37

14. What is the nature of the difference between the face value and the issue price of a Zero-Coupon Bond?

15 / 37

15. What is the tax rate applicable to interest on foreign currency convertible bonds of an Indian Company or Public Sector Company?

16 / 37

16. How are Deep Discount Bonds issued in relation to their face value?

17 / 37

17. What is the formula to calculate short-term capital gain?

"Example 6: ABC Ltallotted 400 Zero Coupon Bonds of face value of Rs. 1,000 each to Mr. X on 01-04-2020. The Bonds were issued to Mr. X at a discounted price of Rs. 400 per bonThe bonds are redeemable in March, 2030. However, Mr X transfers such bonds to

Mr. Y on 25-03-2021 for Rs. 500 each. Compute the capital gain chargeable in the hands of Mr. X."

18 / 37

18. How are Zero-Coupon Bonds issued to investors?

19 / 37

19. What is the tax treatment of interest arising from bonds?

20 / 37

20. What is the term used for the interest rate used in determining the present value of future cash flows of a bond?

21 / 37

21. What is the tax rate applicable to interest on rupee-denominated bonds of an Indian company or Government security?

22 / 37

22. How is taxable income from securities computed?

23 / 37

23. What is the tax rate applicable to short-term capital gains from the transfer of Zero Coupon Bonds?

"Example 6: ABC Ltallotted 400 Zero Coupon Bonds of face value of Rs. 1,000 each to Mr. X on 01-04-2020. The Bonds were issued to Mr. X at a discounted price of Rs. 400 per bonThe bonds are redeemable in March, 2030. However, Mr X transfers such bonds to

Mr. Y on 25-03-2021 for Rs. 500 each. Compute the capital gain chargeable in the hands of Mr. X."

24 / 37

24. In Example 6, what is the period of holding for the Zero Coupon Bonds?

"Example 6: ABC Ltallotted 400 Zero Coupon Bonds of face value of Rs. 1,000 each to Mr. X on 01-04-2020. The Bonds were issued to Mr. X at a discounted price of Rs. 400 per bonThe bonds are redeemable in March, 2030. However, Mr X transfers such bonds to

Mr. Y on 25-03-2021 for Rs. 500 each. Compute the capital gain chargeable in the hands of Mr. X."

25 / 37

25. Under which head of income are profits or gains on redemption of bonds chargeable to tax?

26 / 37

26. What is the tax rate applicable to interest received from a notified Infrastructure Debt Fund?

27 / 37

27. What is the full value of consideration in Example 6?

"Example 6: ABC Ltallotted 400 Zero Coupon Bonds of face value of Rs. 1,000 each to Mr. X on 01-04-2020. The Bonds were issued to Mr. X at a discounted price of Rs. 400 per bonThe bonds are redeemable in March, 2030. However, Mr X transfers such bonds to

Mr. Y on 25-03-2021 for Rs. 500 each. Compute the capital gain chargeable in the hands of Mr. X."

28 / 37

28. What is the definition of a coupon bond?

29 / 37

29. What is the classification of income earned from debt instruments?

30 / 37

30. What does ICDS-IV deal with?

31 / 37

31. What are the key features of a bond?

32 / 37

32. How is the nature of the capital gain determined in Example 6?

"Example 6: ABC Ltallotted 400 Zero Coupon Bonds of face value of Rs. 1,000 each to Mr. X on 01-04-2020. The Bonds were issued to Mr. X at a discounted price of Rs. 400 per bonThe bonds are redeemable in March, 2030. However, Mr X transfers such bonds to

Mr. Y on 25-03-2021 for Rs. 500 each. Compute the capital gain chargeable in the hands of Mr. X."

33 / 37

33. What are the two methods of accounting allowed under the Income-tax Act?

34 / 37

34. What are Deep Discount Bonds (DDBs)?

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