Bought a bond 6 months before maturity. TDS was deducted on Rs 776. I only made Rs 35. Is this correct?

QnA Discussions
1

Bought a cumulative bond from the secondary market about 6 months before maturity. Original issue price was Rs 1,000, maturity value was Rs 1,776. I paid Rs 1,741 in the secondary market. At redemption I received Rs 1,776 minus TDS on the full Rs 776 gain from original issue. My actual gain was only Rs 35 but TDS was deducted on Rs 776.

Is this correct? Feels like I am being taxed on someone else’s gain. And how do I handle this in my ITR?

Disc: filing ITR for the first time and this has genuinely confused me.

2

Yes, it is correct and unfortunately it is one of the nastier quirks of buying cumulative or zero coupon bonds in the secondary market close to maturity. The issuer deducts TDS on the entire interest component from the original issue price, which is Rs 776. They have no way to know what you personally paid in the secondary market. Their obligation is to deduct TDS on the full amount of interest accrued since original issuance, regardless of when you bought it. So yes, you are effectively paying TDS on interest that accrued before you even owned the bond. The remedy is in your ITR, not at the source.

3

wait so the issuer literally doesn’t know you bought it recently? they just see original issue and maturity value and deduct on the full difference?

4

Exactly. The registrar has the original issue data. When they process the redemption they calculate the total gain from issue price to face value and deduct TDS on that. Your purchase price in the secondary market is your business, not theirs.

5

The ITR treatment has two separate parts and it is important to keep them distinct. The Rs 776 is income from other sources at your slab rate. The entire Rs 776 is taxable, not just your Rs 35 portion. You will owe tax on Rs 776. The TDS already deducted on Rs 776 will appear in your Form 26AS. That credit gets applied against your total tax liability. If your slab rate is 30%, your tax on Rs 776 is Rs 233, and the TDS already deducted at 10% was Rs 77. You pay the remaining Rs 156 at filing. Separately, your Rs 35 capital gain from the price difference is a short-term capital gain if you held under 12 months, taxed at your slab rate as well. Report that under Schedule CG and the Rs 776 under Schedule OS.