Old deep discount bonds exempt from accrued tax

as pressure mounts on the finance minister to roll back some of the budget proposals, the investor community has finally got something to cheer about. the reason: a clarification on deep discount bonds. investors were initially worried when a change in the way income from these funds were to be taxed was announced earlier. according to a circular in february ’02, it was proposed that income from deep discount bonds be taxed on an accrual basis every year, based on valuations at the end of the financial year. this triggered concern among the bonds holders as to how the bonds will be valued for fiscal ’01-02, and regarding the consequent tax effect. however, the recent clarification issued by the central board of direct taxes (cbdt), while justifying the taxation, says that this mode of calculation will not be applicable to existing bond holders and will be applicable only to bonds issued after the february ’02 circular. chartered accountants, in particular, are a pleased lot because without the clarification, their workload would have gone up on two counts. first was the compliance aspect, which meant valuing all the bonds held by their clients, most of which are 5-6 years old. second was the tax effect that this threw up. a major concern here was that this could play havoc with their calculations for the financial year ’01-02. the new circular has put paid to all these fears. analysts point out that investors can also hope for further relief on the tax deduction at source (tds) aspect on certain bonds. the amount received on redemption is liable for tds, but the clarification points out that bonds issued by an institution, authority, public sector company or co-operative society can be exempt by notification. if this is done, then investors in that particular issue would not have to worry about a host of compliance problems ranging from obtaining a tds certificate to getting refunds necessitated merely because of the tds. and the final gain is in the form of an option provided to non-corporate borrowers, who invest small amounts in new issues of face value up to rs 1 lakh, that they can still opt for the old system. tax consultants say that this rule gives them the freedom to properly plan the investment structure for small investors, depending on their needs and requirements.