Tax treatment of income from Deep Discount Bonds (DDBs)

1. Income based on Market Value:

(a) Market Value: Market Value of DDBs will be determined at the end of every financial year, 31st
March, that is, as per the values declared by RBI or Primary Dealers Association of India, jointly with the Fixed Income Money Market and Derivatives Association of India.

(b) Income: The difference between market values on the opening and closing dates of that financial year constitutes income of that year.

(c) Computation of Income: The income chargeable will be computed as under

• For Original Subscribers: Difference between market values on 31st March (Closing date) and 1st April (Opening date) of that financial year.

• For Subsequent purchasers: Difference between market values on 31st March (Closing date) and cost of Purchase of bond.

(d) Taxable as- this income will be treated as interest in case of investors and business income in case of traders.

2. Transfer before maturity: If the bondholder transfers the bond before maturity

(a) In case of Investors: Capital Gains = Sale Price Less Cost of Acquisition of the Bond
Nature of Capital Gain: Capital Gain is always Short-Term since income is offered upto 31st March of the previous year and the holding period will always be less than 12 months.
Cost of Bond = Cost of Acquisition (subscription price paid by origlnal lnvestor or purchase price paid by intermediate purchaser) and the income already offered to tax by the bondholder upto the date of transfer.

(b) In case of Traders: Business Income = Sale Price Less Cost of Acquisition of the Bond

3. Redemption on Maturity:

(a) If the original subscriber redeems the DDB

• In case of Investors:
Interest Income = Redemption Price Less Market Value as on the last valuation date immediately
preceding the maturity date

• In case of Traders:
Business Income = Redemption Price Less Market Value as on the last valuation date immediately
preceding the maturity date

(b) If an intermediate purchaser redeems the DDB
Interest or Business Income = Redemption Price Less Cost of the Bond to such purchaser Cost =
Cost of Acquisition (subscription price paid by original investor or purchase price paid by intermediate purchaser) and the income already offered to tax by the bondholder up-to the date of redemption.

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