Income Tax on Convertible Bonds:
- A convertible bond is a fixed-income corporate debt security that yields interest payments, but can be converted into a predetermined number of common stock or equity shares. The conversion from the bond to stock can be done at certain times during the bond’s life and is usually at the discretion of the bond holder.
- According to section 2(47) of the Income Tax Act, 1961, ‘Transfer‘ includes the exchange of assets. Any conversion of bonds into shares or any other asset is considered an “exchange” and falls within the definition of transfer.
- As per Section 45, “any profits or gains arising from the transfer of a capital asset effected in the previous year will be chargeable to income-tax under the head Capital Gains.“
- However, in accordance with sec 47(x), any transfer by way of conversion of bonds or debentures, debenture-stock or deposit certificates in any form, of a company into shares or debentures of that company would not be regarded as transfer for the purpose of capital gain computation.
- Hence the said conversion of bonds into shares does not attract any capital gains tax implications at the point of conversion.
- However, when such shares are sold off, capital gains tax would be applicable and for the purpose of computing capital gains from such shares, the acquisition cost as well as the period of holding of the debenture would be relevant.
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