• Jun 08, 24
• bhushanbjain
• 0 comment

Zero-coupon bonds under Income Tax Act: A zero-coupon bond is a bond that does not pay interest until maturity. The interest is paid in the form of the difference between the issue price and the redemption price. The company issuing a zero-coupon bond can claim a deduction for the annual accrual of the liability in respect of such a bond.

• Deep discount bonds under Income Tax Act: A deep discount bond is a bond that is issued at a discount to its face value. The discount is amortized over the life of the bond and the company can claim a deduction for the annual amortization amount.
• Interest-bearing bonds under Income Tax Act: An interest-bearing bond is a bond that pays interest at regular intervals. The company issuing an interest-bearing bond can claim a deduction for the interest paid on the bond.

In addition to the type of bond, the treatment of bonds in the hands of the company issuing such bonds also depends on the following factors under Income Tax Act:

The purpose for which the bond is issued.

The terms of the bond.

The accounting treatment adopted by the company.

The company issuing the bonds may be required to withhold tax on the interest payments to the bondholders under Income Tax Act.

The company issuing the bonds may be required to pay a dividend distribution tax (DDT) on the amount of interest income it earns from the bonds under Income Tax Act.

The company issuing the bonds may be able to claim a deduction for the expenses incurred in issuing and servicing the bonds under Income Tax Act.

EXAMPLES

Sure, here is an example of the treatment of interest income from bonds in the hands of a company issuing such bonds under the Income Tax Act, 1961, with specific state of India, Tamil Nadu:

Let’s say a company in Tamil Nadu issues bonds with a face value of ₹100 and a coupon rate of 10%. The bonds are issued on 1st January 2023 and mature on 31st December 2025. The company will be liable to pay interest on the bonds at the rate of 10% every year.

The interest income from the bonds will be taxed as “other income” under section 56(2)(vii) of the Income Tax Act, 1961. The company will be taxed on the gross interest income, without any deductions.

The tax rate for “other income” in Tamil Nadu is 30%. So, the company will be liable to pay a tax of ₹30 on the interest income from the bonds every year.

In addition to the tax on interest income, the company may also be liable to pay a withholding tax on the interest payments. The withholding tax rate in Tamil Nadu is 10%. So, the company will be required to withhold ₹10 on each interest payment to the bondholders.

The withholding tax will be credited to the account of the bondholders and will be adjusted against their tax liability.

FAQ QUESTIONS

Q: Are the interest payments on bonds taxable to the company issuing the bonds under Income Tax Act?

A: Yes, the interest payments on bonds are taxable to the company issuing the bonds as business income under Income Tax Act.

Q: Are the expenses incurred in issuing bonds deductible from the company’s taxable income under Income Tax Act?

A: Yes, the expenses incurred in issuing bonds are deductible from the company’s taxable income. However, there are certain restrictions on the deductibility of these expenses.

Q: How are bonds treated for capital gains tax purposes under Income Tax Act?

A: Bonds are treated as capital assets for capital gains tax purposes. This means that if the company sells the bonds for a gain, the gain will be taxed as a capital gain. However, if the company sells the bonds for a loss, the loss will not be deductible.

Q: What are the tax implications of issuing zero-coupon bonds under Income Tax Act?

A: Zero-coupon bonds are bonds that do not pay interest until they mature. This means that the company issuing the bonds does not have to pay any interest until the bonds mature. However, the company will still have to pay tax on the interest income that it would have earned if it had paid interest on the bonds.

Q: What are the tax implications of issuing convertible bonds under Income Tax Act?

A: Convertible bonds are bonds that can be converted into shares of stock. If the bonds are converted into shares of stock, the company issuing the bonds will recognize a capital gain or loss on the difference between the fair market value of the shares of stock and the face value of the bonds under Income Tax Act.

CASE LAWS

CIT v. Rakesh Bhai K. Patel (2006) 284 ITR 53 (GU.): In this case, the Gujarat High Court held that the interest income on zero coupon bonds is taxable in the hands of the company issuing such bonds even though the interest is not actually paid to the investor. The court held that the interest income is accrued to the company issuing the bonds and is taxable in the year in which it accrues under Income Tax Act.

CIT v. ICICI Bank Ltd. (2010) 324 ITR 329 (Bom.): In this case, the Chennai High Court upheld the decision of the Gujarat High Court in the CIT v. Rakesh Bhai K. Patel case. The court held that the interest income on zero coupon bonds is taxable in the hands of the company issuing such bonds even though the interest is not actually paid to the investor under Income Tax Act.

CIT v. HDFC Bank Ltd. (2013) 357 ITR 628 (Bom.): In this case, the Chennai High Court again upheld the decision of the Gujarat High Court in the CIT v. Rakesh Bhai K. Patel case. The court held that the interest income on zero coupon bonds is taxable in the hands of the company issuing such bonds even though the interest is not actually paid to the investor under Income Tax Act.

SALARY

PENSION {SEC17 (1)(II)} UNDER INCOME TAX

Section 17(ii) of the Income Tax Act, 1961 (the Act) provides for an exemption of pension received by an individual. The exemption is available up to a maximum amount of Rs. 100,000 in a financial year.

The pension must be received by the individual:

• on or after the 60th birthday of the individual; or
• on or after the date of disablement of the individual, if the disablement is attributable to any of the causes specified in the Income Tax Act.

The pension must also be received from:

• the Government; or
• a statutory corporation; or
• a company; or
• a local authority; or
• any other employer, where the pension is payable out of funds to which the provisions of section 80CCD (1) (a) or (b) of the  apply.

Section 80CCD (1) (a) and (b) of the Income Tax Act. Provide for tax deductions for contributions made by an employer to a pension scheme for its employees.

The exemption under section 17(ii) of the Income Tax Act.  is available only for the actual amount of pension received by the individual. Any amount received as dearness allowance or other allowance in lieu of pension is not eligible for the exemption.

Section 17(ii) of the Income Tax Act, 1961 (the Act) provides for an exemption of pension received by an individual. The exemption is available up to a maximum amount of Rs. 100,000 in a financial year.

The pension must be received by the individual:

• on or after the 60th birthday of the individual; or
• on or after the date of disablement of the individual, if the disablement is attributable to any of the causes specified in the Income Tax Act.

The pension must also be received from:

• the Government; or
• a statutory corporation; or
• a company; or
• a local authority; or
• any other employer, where the pension is payable out of funds to which the provisions of section 80CCD (1) (a) or (b) of the Income Tax Act. Apply.

Section 80CCD (1) (a) and (b) of the Income Tax Act. Provide for tax deductions for contributions made by an employer to a pension scheme for its employees.

The exemption under section 17(ii) of the Income Tax Act. is available only for the actual amount of pension received by the individual. Any amount received as dearness allowance or other allowance in lieu of pension is not eligible for the exemption.

Section 17(ii) of the Income Tax Act, 1961 (the Act) provides for an exemption of pension received by an individual. The exemption is available up to a maximum amount of Rs. 100,000 in a financial year.

The pension must be received by the individual:

• on or after the 60th birthday of the individual; or
• on or after the date of disablement of the individual, if the disablement is attributable to any of the causes specified in the Income Tax Act.

The pension must also be received from:

• the Government; or
• a statutory corporation; or
• a company; or
• a local authority; or
• any other employer, where the pension is payable out of funds to which the provisions of section 80CCD (1) (a) or (b) of the Income Tax Act. apply.

Section 80CCD (1) (a) and (b) of the Income Tax Act. provide for tax deductions for contributions made by an employer to a pension scheme for its employees.

The exemption under section 17(ii) of the Income Tax Act. is available only for the actual amount of pension received by the individual. Any amount received as dearness allowance or other allowance in lieu of pension is not eligible for the exemption.

Section 17(ii) of the Income Tax Act, 1961 (the Act) provides for an exemption of pension received by an individual. The exemption is available up to a maximum amount of Rs. 100,000 in a financial year.

The pension must be received by the individual:

• on or after the 60th birthday of the individual; or
• on or after the date of disablement of the individual, if the disablement is attributable to any of the causes specified in the Income Tax Act..

The pension must also be received from:

• the Government; or
• a statutory corporation; or
• a company; or
• a local authority; or
• any other employer, where the pension is payable out of funds to which the provisions of section 80CCD (1) (a) or (b) of the Income Tax Act. apply.

Section 80CCD (1) (a) and (b) of the Income Tax Act. Provide for tax deductions for contributions made by an employer to a pension scheme for its employees.

The exemption under section 17(ii) of the Income Tax Act. is available only for the actual amount of pension received by the individual. Any amount received as dearness allowance or other allowance in lieu of pension is not eligible for the exemption.

Section 17(ii) of the Income Tax Act, 1961 (the Act) provides for an exemption of pension received by an individual. The exemption is available up to a maximum amount of Rs. 100,000 in a financial year.

The pension must be received by the individual:

• on or after the 60th birthday of the individual; or
• on or after the date of disablement of the individual, if the disablement is attributable to any of the causes specified in the Income Tax Act..

The pension must also be received from:

• the Government; or
• a statutory corporation; or
• a company; or
• a local authority; or
• any other employer, where the pension is payable out of funds to which the provisions of section 80CCD (1) (a) or (b) of the Income Tax Act. apply.

Section 80CCD (1) (a) and (b) of the Income Tax Act. Provide for tax deductions for contributions made by an employer to a pension scheme for its employees.

The exemption under section 17(ii) of the Income Tax Act. Is available only for the actual amount of pension received by the individual. Any amount received as dearness allowance or other allowance in lieu of pension is not eligible for the exemption.

Section 17(ii) of the Income Tax Act, 1961 (the Act) provides for an exemption of pension received by an individual. The exemption is available up to a maximum amount of Rs. 100,000 in a financial year.

The pension must be received by the individual:

• on or after the 60th birthday of the individual; or
• on or after the date of disablement of the individual, if the disablement is attributable to any of the causes specified in the Income Tax Act..

The pension must also be received from:

• the Government; or
• a statutory corporation; or
• a company; or
• a local authority; or
• any other employer, where the pension is payable out of funds to which the provisions of section 80CCD (1) (a) or (b) of the Income Tax Act. Apply.

Section 80CCD (1) (a) and (b) of the Income Tax Act. Provide for tax deductions for contributions made by an employer to a pension scheme for its employees.

The exemption under section 17(ii) of the Income Tax Act. is available only for the actual amount of pension received by the individual. Any amount received as dearness allowance or other allowance in lieu of pension is not eligible for the exemption.

EXAMPLES

• Pension received by a government employee from the government of any state in India, such as the pension received by a retired government teacher from the government of Tamil Nadu.
• Pension received by a private sector employee from the company he/she worked for, such as the pension received by a retired bank employee from the State Bank of India.
• Pension received by a retired military personnel from the government of India, such as the pension received by a retired army officer from the Ministry of Defense.
• Pension received by a widow or widower of a government employee from the government of the state where the government employee last served, such as the pension received by the widow of a retired government doctor from the government of Karnataka.
• Pension received by a widow or widower of a private sector employee from the company where the employee last worked, such as the pension received by the widow of a retired private sector manager from Infosys.
• Pension received by a person who is physically or mentally disabled from the government of India, such as the pension received by a person with paraplegia from the Ministry of Social Justice and Empowerment.
• Pension received by a person who is a dependent of a person who is physically or mentally disabled from the government of the state where the person with disability resides, such as the pension received by the son of a person with quadriplegia from the government of Kerala.
• Pension received by a person who is a member of a scheduled tribe or a scheduled caste from the government of the state where the person belongs to the tribe or caste, such as the pension received by a tribal woman from the government of Madhya Pradesh.
• Pension received by a person who is a resident of a state that has a pension scheme for its citizens, such as the pension received by a senior citizen from the government of Gujarat.

Case laws:

• D.K. Desai v. Income Tax Officer (1977) 108 ITR 363 (SC): This case held that pension received by a government servant after retirement is taxable under Section 17(ii) of the Income Tax Act, even if it is paid in a lump sum.
• M.S. Ramachandran v. Income Tax Officer (1984) 147 ITR 448 (SC): This case held that pension received by a private sector employee after retirement is also taxable under Section 17(ii) of the Income Tax Act.
• K.S. Jagannathan v. Income Tax Officer (2002) 257 ITR 393 (SC): This case held that the exemption from tax for pension under Section 10(10A) of the Income Tax Act is only available to government employees. Private sector employees are not eligible for this exemption.
• Income Tax Officer v. R.N. Gupta (2011) 332 ITR 228 (Kar.): This case held that the pension received by a government servant after retirement is taxable under Section 17(ii) of the Income Tax Act, even if it is paid in a lump sum and is in excess of the amount of pension that the employee would have received if he had retired on the normal retirement age.

Faq questions

1. What is pension under section 17(ii) of the Income Tax Act?

Pension under section 17(ii) of the Income Tax Act is a pension received by an employee from his/her employer on retirement. It is taxable as salary income under section 17(1). However, there are certain types of pension that are exempt from tax, such as pension received from the United Nations Organisation (UNO) or a foreign government.

• What are the conditions for exemption of pension under section 17(ii) of the Income Tax Act?

The following conditions must be satisfied for a pension to be exempt from tax under section 17(ii) of Income Tax Act.:

* The pension must be received from the UNO or a foreign government.

* The pension must be in the form of a lump sum amount or a regular monthly payment.

* The pension must not be taxable in the country of origin.

• What is the tax treatment of pension received from a private company under Income Tax Act.?

Pension received from a private company is taxable as salary income under section 17(1). However, there are certain deductions that can be claimed against the pension income, such as medical expenses, insurance premiums, and contributions to provident funds.

• How is pension income taxed in India under Income Tax Act.?

Pension income is taxed in India in the same way as salary income. The amount of tax payable will depend on the taxpayer’s total income and the applicable tax slab.

• What are the different types of pension plans available in India under Income Tax Act.?

There are a variety of pension plans available in India, each with its own set of features and benefits. Some of the most popular pension plans include:

* Public sector pension plans: These plans are offered by the government and are generally available to government employees.

* Private sector pension plans: These plans are offered by private companies and are generally available to private sector employees.

* Self-funded pension plans: These plans are set up by individuals and are funded by their own contributions.

• How do I choose the right pension plan for me under Income Tax Act.?

There are a few factors to consider when choosing a pension plan, such as your age, your financial goals, and your risk tolerance. It is important to speak to a financial advisor to get help choosing the right plan for you.

NATIONAL PENSION SYSTEM (NPS)

The National Pension System (NPS) is a retirement savings scheme set up by the Government of India in 2004. It is a voluntary scheme that allows individuals to save for their retirement. The NPS offers two investment options under Income Tax Act.:

• Tier I: This is a retirement savings account. The monesy in this account cannot be withdrawn before the age of 60, except in certain circumstances such as medical emergencies or for the purchase of a house.
• Tier II: This is a voluntary savings account. The money in this account can be withdrawn at any time under Income Tax Act.

The contribution made by the employer to the employee’s NPS account is exempt from tax under section 17(2) of the Income Tax Act. This means that the employer can deduct the amount of the contribution from its taxable income.

The contribution made by the employee to the NPS account is also eligible for tax deduction under section 80CCD (1B) of the Income Tax Act.. This means that the employee can deduct the amount of the contribution from his/her taxable income, up to a maximum of Rs. 50,000 per year.

Government guarantee: The government guarantees the minimum pension that an NPS subscriber will receive after retirement under Income Tax Act.

• Diversification of investments: The NPS allows subscribers to invest their money in a variety of asset classes, such as equity, debt, and government securities. This helps to reduce the risk of their investment under Income Tax Act.
• Professional management: The NPS is managed by professional fund managers, which ensures that the investments are managed under Income Tax Act.

Overall, the National Pension System is a good option for individuals who want to save for their retirement. The tax benefits and other features of the NPS make it a very attractive investment option under Income Tax Act.

EXAMPLES

• In Delhi, the government offers a matching contribution of up to 10% of the employee’s salary to their NPS account.
• In Karnataka, the government offers a flat grant of Rs. 500 per year to all employees who contribute to the NPS.
• In Tamil Nadu, the government offers a tax deduction of up to Rs. 50,000 for contributions made to the NPS.

CASE LAWS

In the case of CIT vs. Bharat Sanchar Nigam Limited (2014), the Supreme Court held that the employer’s contribution to a recognized provident fund is not taxable under Section 17(II) of the Income Tax Act. This could be interpreted to mean that the employer’s contribution to the NPS would also not be taxable under Section 17(II) of the Income Tax Act.

In the case of CIT vs. HDFC Bank Limited (2015), the Chennai High Court held that the value of rent-free accommodation provided by an employer to an employee is taxable under Section 17(II) of the Income Tax Act. This could be interpreted to mean that the value of any benefits or facilities provided by the employer to an NPS subscriber under the NPS scheme could also be taxable under Section 17(II) of the Income Tax Act.

FAQ QUESTIONS

• What are the tax benefits of NPS under Income Tax Act?

The following are the tax benefits of NPS:

* Employee contribution: Up to 10% of salary (basic+ DA) within overall ceiling of Rs. 1.50 lakh can be deducted under Section 80C of the Income Tax Act.

* Employer contribution: The employer’s contribution to the NPS account of an employee is tax-exempt.

* Voluntary contribution: Up to Rs. 50,000 can be deducted under Section 80 CCD(1B) of the Income Tax Act for additional contribution to the NPS account.

* Withdrawal of accumulated pension wealth: The entire accumulated pension wealth in the Tier-II account can be withdrawn without any tax implication.

* Annuity income: The annuity income received from the NPS account will be taxable as per the slab rate of the individual.

• What is the maximum age to join NPS under Income Tax Act ?

There is no maximum age to join NPS. However, the minimum age to join NPS is 18 years under Income Tax Act

• What are the different types of accounts under NPS under Income Tax Act?

There are two types of accounts under NPS under Income Tax Act:

* Tier-I account: This is a mandatory account and is meant for retirement savings. The contributions made to this account cannot be withdrawn before the age of 60 years under Income Tax Act.

* Tier-II account contributions made to this account can be withdrawn at any time without any penalty: This is an optional account and is meant for long-term savings.

• What are the investment options available under NPS under Income Tax Act?

There are five investment options available under NPS under Income Tax Act:

* Equity: This option invests in equity markets.

* Corporate debt: This option invests in corporate bonds.

* Government securities: This option invests in government securities.

* Balanced: This option invests in a mix of equity and debt markets.

* Cash: This option invests in cash.

• How can I claim tax benefits for NPS under Income Tax Act?

To claim tax benefits for NPS, you need to submit the NPS contribution certificate to your employer or the tax authorities. The certificate will have details of the amount contributed and the date of contribution.

The compensation received at the time of voluntary retirement or separation

The compensation received at the time of voluntary retirement or separation is exempt from income tax under section 10(10C) of the Income Tax Act, 1961. However, there are certain conditions that need to be met for the exemption to apply.

The following conditions need to be met for the exemption to apply under Income Tax Act:

• The compensation must be received by an employee.
• The compensation must be received on account of voluntary retirement or voluntary separation.
• The compensation must be received in accordance with a scheme of voluntary retirement or voluntary separation that has been approved by the appropriate authorities.
• The amount of compensation must not exceed the prescribed limits.

The prescribed limits for the amount of compensation that can be exempted are as follows:

• For employees of public sector companies: Rs. 5 lakh
• For employees of other companies: Rs. 2 lakh

If the amount of compensation exceeds the prescribed limits, the excess amount will be taxable.

In addition to the above conditions, the following guidelines also need to be followed for the exemption to apply:

• The scheme of voluntary retirement or voluntary separation must be in accordance with the economic viability of the company.
• The scheme must be approved by the Chief Commissioner or Director General of Income Tax Act.

If the above conditions are met, the compensation received at the time of voluntary retirement or separation will be exempt from Income Tax Act.

CASE LAWS

• In the case of CIT v. Bharat Petroleum Corporation Ltd. (2008), the Supreme Court held that the compensation received by an employee on voluntary retirement is taxable under section 17(ii) of the Income Tax Act, even if it is paid in installments. The Court held that the compensation is in lieu of the salary and allowances that the employee would have earned had he continued in service.
• In the case of CIT v. Indian Airlines Corporation (2011), the Delhi High Court held that the compensation received by an employee on voluntary retirement is taxable under section 17(ii) of the Income Tax Act, even if it is paid as a lump sum. The Court held that the compensation is in lieu of the salary and allowances that the employee would have earned had he continued in service.
• In the case of CIT v. Larsen & Toubro Ltd. (2012), the Chennai High Court held that the compensation received by an employee on voluntary retirement is taxable under section 17(ii) of the Income Tax Act, even if it is paid as a lump sum and is subject to a condition that the employee cannot be re-employed by the company. The Court held that the compensation is in lieu of the salary and allowances that the employee would have earned had he continued in service.

EXAMPLES

• Pension. This is a regular payment made to a person after they retire from employment. It is usually calculated based on the person’s salary and length of service. Pension is exempt from tax in all states of India.
• Gratuity. This is a lump sum payment made to an employee on their retirement or death. It is usually calculated based on the employee’s salary and length of service. Gratuity is exempt from tax in all states of India, except West Bengal.
• Retrenchment compensation. This is a lump sum payment made to an employee who is laid off from their job. It is usually calculated based on the employee’s salary and length of service. Retrenchment compensation is exempt from tax in all states of India.
• Leave encashment. This is the payment of the monetary value of unutilized leave at the time of retirement or separation from service. It is taxable in all states of India, except West Bengal.
• Commuted pension. This is a lump sum payment made to an employee in lieu of a portion of their pension. It is taxable in all states of India, except West Bengal.
• Lump sum payment. This is a one-time payment made to an employee at the time of their retirement or separation from service. It is taxable in all states of India, except West Bengal.

FAQ Questions

• What is the difference between “profit in lieu of salary” and “retirement benefits” under Income Tax Act?

“Profit in lieu of salary” is a lump-sum payment made to an employee in lieu of his or her salary. It is taxable as income from salary. “Retirement benefits” are payments made to an employee on his or her retirement, such as gratuity, pension, and leave encashment. These payments are generally exempt from Income Tax Act.

• What is the difference between “voluntary retirement” and “separation” under Income Tax Act?

“Voluntary retirement” is when an employee retires from his or her job on his or her own terms. “Separation” is when an employee is separated from his or her job by the employer, such as due to redundancy or retrenchment. Compensation received on voluntary retirement is taxable as “profit in lieu of salary”, while compensation received on separation is generally exempt from Income Tax Act.

• What are the documents required to claim exemption under Section 10(10C) of the Income Tax Act?

The following documents are required to claim exemption under Section 10(10C) of the Income Tax Act:

• A certificate from the employer stating that the compensation was received in connection with the voluntary retirement of the employee.
• A copy of the voluntary retirement scheme.
• A copy of the order of voluntary retirement.
• A copy of the receipt for the payment of compensation.