Sale of Debentures

​​How to calculate the cost of acquisition?​​

The cost of acquisition of an asset is the value for which it was acquired by the assessee. It is reasonable to include in the actual cost of a capital asset all the expenses which are incurred by the assessee to acquire it.​

​Expenditure incurred in connection with the transfer

Any expenditure incurred wholly and exclusively in connection with the transfer of a capital asset is allowed as a deduction while computing capital gain. Thus, the brokerage or commission, stamp duty, registration fee, traveling expenses, legal expenses, etc., incurred in connection with the transfer are allowed to be deducted in computing capital gain.

However, no deduction is allowed in respect of any sum paid on account of Securities Transaction Tax while calculating the capital gains from the sale of securities.​

​​​​​​How to calculate the period of holding?

In general

The period of holding of a capital asset is calculated from the date of its purchase or acquisition till the date immediately preceding the date of its transfer.

Period of holding in case of shares

(a) Listed shares

If listed shares or securities are sold through brokers, the date of the broker's note is treated as the date of transfer, provided the contract is followed up by delivery. Thus, the period of holding should be counted from the date of purchase to the date of the broker's note.

In case the transaction takes place directly between the parties and not through the stock exchange, the date of contract of sale as declared by the parties is treated as the date of transfer, provided it is followed by the actual delivery of shares and the transfer deeds.

(b) Securities held in Demat form

The period of holding securities held in Demat form shall be determined as per the First-In-First-Out (FIFO) method. It implies that the securities that first entered into the Demat account is deemed to be the first to be sold out. In other words, the securities acquired last will be taken to be remaining with the assessee, while securities acquired first will be treated as sold.

For determining the period of holding, the contract note, or broker's note shall be considered, provided such transactions are followed by the delivery of shares and transfer deeds.

(c) Bonus shares

Where shares or any other security is allotted without any payment on the basis of holding of any other shares or security, the period of holding is reckoned from the date of allotment of such bonus shares or security.

(d) Sweat equity shares

Where securities or shares are allotted or transferred, directly or indirectly, by the employer free of cost or at a concessional rate to his employees (including former employee or employees) the period of holding is reckoned from the date of allotment or transfer of such specified security (ESOPs) or sweat equity shares.

(e) Conversion of shares

Where equity shares become the property of the assessee on its conversion from the preference shares, the period for which the preference shares were held by the assessee is also included in the period of holding of equity shares. In other words, the period of holding shall be considered from the date of acquisition of preference shares.

(f) Conversion of debentures or bonds

In case of conversion of bonds or debentures, debenture-stock or deposit certificates into shares or debentures of that company, the period of holding of converted shares or debentures, as the case may be, shall be considered from the date of acquisition of bond, debenture, debenture-stock or deposit certificate. In other words, the holding period of the original asset shall be taken into consideration while determining the period of holding of converted assets.​

​​How to calculate the cost of acquisition?​​

The cost of acquisition of an asset is the value for which it was acquired by the assessee. It is reasonable to include in the actual cost of a capital asset all the expenses which are incurred by the assessee to acquire it.​

​​Tax rates on capital gains

Tax rates on short-term capital gain

In general

Short-term capital gain is chargeable at normal tax rates as applicable in the case of an assessee.

In the case of specified listed securities

Where the short-term capital gains arising from the transfer of securities being equity shares, units of an equity-oriented fund, or units of business trust, it shall be chargeable to tax under Section 111A at:-.

• 15% for any transfer which takes place before 23-07-2024; and

• 20% for any transfer which takes place on or after 23-07-2024.

The concessional tax rate applies if the Securities Transaction Tax (STT) is paid at the time of the transfer of such securities.

Here it is to be noted that where the short-term capital gain is chargeable to tax at a concessional rate, the assessee shall not be allowed the following benefits:

• Adjustment of basic exemption limit from short-term capital gain

Where the short-term capital gain arising from specified securities is chargeable to tax at a concessional tax rate of 15%, the entire amount of gain is chargeable to tax at such rate. Thus, an assessee is not entitled to adjust the basic exemption limit from the amount of such gain.

Exception: Resident Individual or Resident HUF

The restriction on claiming the benefit of a basic exemption limit from short-term capital gain chargeable to a concessional tax rate of 15%/20% shall not be applicable in the case of a resident individual or resident HUF. Thus, if the total income of a resident individual or resident HUF, as reduced by the amount of short-term capital gains, is less than the maximum exemption limit, the amount of short-term capital gains shall be reduced by that amount that would enable such individual or HUF to claim the maximum exemption limit fully.

For example, if the total income of a resident individual (excluding short-term capital gains) is Rs. 1,85,000 and short-term capital gains from the sale of specified securities is Rs. 1,50,000, the tax under this provision shall be computed on Rs. 85,000. The maximum exemption limit in the case of a resident individual is Rs. 2,50,000, and total income falls short of this limit by Rs. 65,000. The amount of short-term capital gain shall be reduced by Rs. 65,000, and the remaining amount of Rs. 85,000 (Rs. 1,50,000 less Rs. 65,000) shall be charged to tax at the rate of 15%/20%. Further, the assessee shall be eligible to claim the benefit of relief under Section 87A from the amount of tax so computed.

• No deduction under Section 80C to80U

No deduction shall be available under Sections 80C to80U from the short-term capital gain arising from specified securities which are taxable at a concessional tax rate of 15%/20%.

Tax rates on long-term capital gain

a) Long-term capital gains are subject to tax at the rate of:

• 20% for any transfer which takes place before 23-07-2024; and
• 12.5% for any transfer which takes place on or after 23-07-2024.

b) Long-term capital gains arising from transfer of listed securities [other than specified listed securities mentioned in subsequent paragraph] or a zero coupon shall be taxable as follows:

• If transfer takes place before 23-07-2024, long-term capital gains shall be taxable at the following rate, whichever is beneficial:
  1. 20% after taking benefit of indexation; or
  2. 10% without taking benefit of indexation.
• If transfer takes place on or after 23-07-2024, long-term capital gains shall be taxable at 12.5% without indexation.

c) Long-term capital gains arising to a non-residents or foreign company from transfer of unlisted securities shall be taxed at the following rates without giving benefit for indexation;

• 10% for any transfer which takes place before 23-07-2024; and
• 12.5% for any transfer which takes place on or after 23-07-2024.

Note:

(1) The Finance (No. 2) Act, 2024, has provided a uniform tax rate of 12.5% for long-term capital gains on all capital assets and has removed the indexation benefit. Therefore, for long-term capital assets transferred on or after 23-07-2024, the original cost of acquisition or improvement shall be deducted from the full value of consideration to compute capital gains instead of indexed cost of acquisition or indexed cost of improvement. To ease the transition to these new rules, the Government has introduced a grandfathering provision. As per this provision, if the amount of tax under the new law (i.e., the law as amended by the Finance (No. 2) Act, 2024) exceeds the amount of tax under the old law (i.e., the law as it stood immediately before the amendment by the Finance (No. 2) Act, 2024 ), the excess amount shall be ignored. Thus, this provision ensures that the taxpayers do not face higher taxes under the new regime compared to the old one. However, this grandfathering provision applies only to resident individuals or Hindu Undivided Families (HUFs) and only for land or buildings acquired before 23-07-2024.

(2) Beside above, there are special tax rates prescribed under section 115AB, 115AC, 115ACA, 115AD and 115E to tax capital gains.

Here it is to be noted that where the long-term capital gain is chargeable to tax at a concessional rate the assessee shall not be allowed the following benefits:

• Adjustment of basic exemption limit from long-term capital gain

Where the long-term capital gain is chargeable to tax at a concessional tax rate of 20%, the entire amount of gain is chargeable to tax at such rate. Thus, an assessee is not entitled to adjust the basic exemption limit from the amount of such gain.

Exception: Resident Individual or Resident HUF

The restriction on claiming the benefit of a basic exemption limit from long-term capital gain chargeable to a concessional tax rate of 20% shall not be applicable in the case of a resident individual or resident HUF. Thus, if the total income of a resident individual or resident HUF, as reduced by the amount of long-term capital gains, is less than the maximum exemption limit, the amount of long-term capital gains shall be reduced by that amount that would enable such individual or HUF to claim the maximum exemption limit fully. Further, the assessee shall be eligible to claim the benefit of relief under Section 87A from the amount of tax so computed.

• No deduction under Section 80C to80U

No deduction shall be available under Section 80C to80U from the long-term capital gain which is taxable at a concessional tax rate.

In the case of specified listed ​securities

Long-term capital gains arising from transfer of listed equity share, or a unit of an equity oriented fund or a unit of a business trust as referred to in Section 112A shall be chargeable to tax at the rate of:

• 10% in excess of Rs. 1,00,000** for any transfer which takes place before 23-07-2024; and
• 12.5% in excess of Rs. 1,25,000** for any transfer which takes place on or after 23-07-2024.

** The aggregate limit of Rs. 1,25,000 shall be considered to compute long-term capital gains from transfer made during 01-04-2024 to 31-03-2024.

The concessional tax rate applies if the Securities Transaction Tax (STT) is paid at the time of the transfer of such securities. Further, in the case of equity shares, STT should have also been paid at the time of acquisition, subject to certain exceptions.

Where the long-term capital gain is chargeable to tax  under section 112A at a concessional rate, the assessee shall not be allowed the following benefits:

• Adjustment of basic exemption limit from long-term capital gain

Where the long-term capital gain arising from specified securities is chargeable to tax at a concessional tax the entire amount of gain in excess of Rs. 1.25 lakh is chargeable to tax at such rate. Thus, an assessee is not entitled to adjust the basic exemption limit from the amount of such gain.

Exception: Resident Individual or Resident HUF

The restriction on claiming the benefit of basic exemption limit from long-term capital gain chargeable to tax at the rate of 10%/12.5% shall not be applicable in the case of a resident individual or resident HUF. Thus, if the total income of a resident individual or resident HUF, as reduced by the amount of long-term capital gains, is less than the maximum exemption limit, the amount of long-term capital gains shall be reduced by that amount that would enable such individual or HUF to claim the maximum exemption limit fully.

• No computation in foreign currency

The mode of computation of capital gain in foreign currency as available in the case of a non-resident is not applicable when tax is payable under section 112A.

• No deduction under Section 80C to80U

No deduction shall be available under Section 80C to80U from the long-term capital gains arising from specified listed securities which are taxable under this provision.

• No Rebate under Section 87A

Rebate under Section 87A is not available from income-tax payable on long-term capital gain under this provision. However, the rebate shall be allowed from the tax payable on the total income as reduced by tax payable on such capital gains.

Note: The total rebate under Section 87A shall not exceed the amount of income tax payable as per the rates provided in section 115BAC(1A) [effective from AY 2026-27]

How to calculate the period of holding?

In general

The period of holding of a capital asset is calculated from the date of its purchase or acquisition till the date immediately preceding the date of its transfer.

In specified cases

1. Securities held in Demat form
   
   The period of holding securities held in Demat form shall be determined as per the First-In-First-Out (FIFO) method. It implies that the securities that first entered into the Demat account are deemed to be the first to be sold out. In other words, the securities acquired last will be taken to be remaining with the assessee, while securities acquired first will be treated as sold.
   For determining the period of holding, the contract note, or broker's note shall be considered, provided such transactions are followed by the delivery of shares and transfer deeds.
2. Conversion of debentures or bonds
   
   In case of conversion of bonds or debentures, debenture-stock or deposit certificates into shares or debentures of that company, the period of holding of converted shares or debentures, as the case may be, shall be considered from the date of acquisition of bond, debenture, debenture-stock or deposit certificate. In other words, the holding period of the original asset shall be taken into consideration while determining the period of holding of converted assets.

Expenditure incurred in connection with the transfer

Any expenditure incurred wholly and exclusively in connection with the transfer of a capital asset is allowed as a deduction while computing capital gain. Thus, the brokerage or commission, stamp duty, registration fee, traveling expenses, legal expenses, etc., incurred in connection with the transfer are allowed to be deducted in computing capital gain.

However, no deduction is allowed in respect of any sum paid on account of Securities Transaction Tax while calculating the capital gains from the sale of securities.

How to calculate the cost of acquisition?

The cost of acquisition of an asset is the value for which it was acquired by the assessee. It is reasonable to include in the actual cost of a capital asset all the expenses which are incurred by the assessee to acquire it.

Cost of acquisition in specified cases

1. Securities held in Demat form
   
   The cost of acquisition of securities held in Demat form shall be determined as per First-In-First-Out (FIFO) Method. It implies that the securities that first entered into the Demat account are deemed to be the first to be sold out. For determining the cost of acquisition, the contract note or broker's note shall be considered provided such transactions are followed by the delivery of shares and transfer deeds.
2. Conversion of debentures into shares
   
   Any transfer by way of conversion of bonds, debentures, debenture stocks, or deposit certificates in any form into shares or debentures of that company is not treated as a transfer. Thus, no capital gain arises at the time of conversion. Capital gain arises when the shares or debentures received on such conversion are transferred. For computing capital gain, the cost of converted shares or debentures is taken at the price paid for the acquisition of original bonds, debentures, or debenture certificates.

Tax treatment of capital gains

Tax rates on short-term capital gain

Short-term capital gain is chargeable at normal tax rates as applicable in the case of an assessee.

Tax rates on long-term capital gain

• In case transfer takes place before 23-07-2024

The long-term capital gain is chargeable to tax at the rate of 20%. Further, the benefit of indexation shall be available to the assessee while computing the amount of long-term capital gain but the benefit of indexation shall not be allowed in the case of bonds and debentures except sovereign gold bonds or capital-indexed bonds.

Thus, the long-term capital gain arising from the transfer of debentures and bonds (other than capital-indexed bonds and sovereign gold bonds) is chargeable to tax at the rate of 20% without providing the benefit of indexation.

However, an assessee shall have the option to pay tax either at the rate of 10% (without indexation) where the long-term capital gain arises from the transfer of the following securities:

1. Listed Securities (other than units)
2. Zero-Coupon Bonds

• In case transfer takes place on or after 23-07-2024

The long-term capital gain is chargeable to tax at the rate of 12.5% without the benefit of indexation.

Accordingly, the tax rates in case of long-term capital gain arising to a resident person from the transfer of coupon bonds can be explained with the help of the following table:

Note: The Finance (No. 2) Act, 2024 has amended Section 50AA to provide that capital gain from unlisted bonds or unlisted debentures that are transferred or redeemed or mature on or after 23 July 2024 shall also be deemed to be the capital gains arising from the transfer of a short-term capital asset irrespective of the period of holding.