Budget 2023 introduced a tax of 10% on the source (TDS) on coupon payments of stated bonds. Although the intention was to guarantee tax compliance, it created unforeseen complications for private individuals – especially small investors and pensioners who depend on predictable coupon income.
TDS is a system that collects taxes at the source of income distribution. In the context of bonds, this means that the entity that pays the coupon pays 10% as taxes and deposits it to the government. Although this seems simple, there are various hidden problems in the way TDS applies to bonds – especially in secondary market transactions.
When bonds are traded between coupon payment data, the buyer compensates for the seller for accrued interest. However, if the coupon is paid, the new buyer will receive the full amount for the period, with 10% TDS deducted from the full amount.
The buyer is effectively taxed on the entire coupon, although part of the interest rates relate to the period in which the bond was retained by the previous owner. This causes a discrepancy in cash flows and the expected yield or returns can initially be anticipated.
How are retail investors affected?
Small or retail investors often invest in bonds to achieve predictable returns. TDS influences them by interrupting the cash flow and complicating the application requirements, since excessive TDS deduction claims must be repayments.
One of the crucial challenges is the reflection of coupon interest in form 26AS, which worsens the complications around TDS. Investors have pointed out that the entire coupon amount is shown as “interest paid” in form 26AS, although part of this interest was already compensated as accrued interest at the time of purchase in the secondary market.
This wrong display in the AIS (annual information statement) creates extra obstacles. When submitting their tax returns, investors must reconcile these discrepancies, often lead to extra control during the tax assessment process, so that they must be clarified or support documentation.
Such situations can force investors to pay tax on income that have already been adjusted and taxed during the purchasing process. This issue has disproportionately influence on small and retail investors, who may miss the means or expertise to navigate through this complexity, thereby further reducing the attraction of bonds as an investment option.
Since TDS makes the coupon and price calculations more difficult, the small investors can be wary to act on the secondary market. This could lower the liquidity on the bond market, which further reduces the attractiveness of bonds as an easily tradable investment.
Special challenges for seniors
For seniors who usually depend on regular interest rates or coupon income, the TDS rules are extra obstacles:
· Form 15g/15h Exemption: Seniors can avoid TDs by submitting form 15g/15h, but the process is not always seamless. Errors, delays or lack of good guidance can lead to unintended deductions.
· Reliance of coupons for living: seniors often use coupon income to cover daily costs. If TDS is deducted unexpectedly, they have to wait to get a repayment-han short-term cash flow and the overall financial planning.
Potential remedies
1. Reconsideration of TDs on listed bonds: A recovery or re -calibration of TDS on coupon payments can remove the unpredictability with which small investors are confronted. It would eliminate administrative burdens related to reimbursements and unpleasant tax processes.
2. Clear guidelines and investor education: the government and regulatory agencies can give detailed guidelines on how TDS should be applied to secondary market transactions, in particular clarify how accrued interest should be treated.
3. Better exemption process: for those who are eligible for exemptions (form 15g/15h), can significantly reduce the creation of a centralized online, user -friendly process errors. This would help to ensure that the correct tax amount is deducted in the first place or not deducted at all.
4. Courage broader retail participation: a simplified tax framework can stimulate the trust of investors and deepen the market.
The introduction of TDs for listed bonds was intended to equalize the rules between activa classes. Investments with a fixed income are very sensitive to cash flows and intended for regular returns with low volatility, in contrast to shares. The tax must therefore also be aware of the activa class.
The 10% TDs on listed bonds, although well -intended for tax conformity, has added a complexity that has disproportionately influence on investors of small bonds. Rearing these rules to take into account secondary market transactions and simplifying exemption processes would promote a more inclusive environment for small investors and at the same time support the growth of the bond market of India.
Vishal Goenka is co-founder of Indiabonds.com
