Tax Treatment on Redemption of Tax Free Bonds

[PRIYAM KHAMBHATA]

Respected Sir

I have purchased tax free bonds face value of Rs.1000000 from secondary market at premium price of Rs.1100000, which are listed on BSE. I have also paid  accrued interest of Rs.75000  to the seller, then what  would be  the cost account for in my books of account. Either Rs.1000000 or Rs.1175000. Please guide me.

I am earning  Interest  on such bonds, which  is Tax Free and  I  am offering  such Interest Income as  Exempt Income in the Return of Income. Is this correct.  

Further,  these tax free bonds will be redeemed at face value  price of Rs.1000000, against  total payment made of  Rs.1175000 towards purchase of tax free bonds,  then would  I  claim capital loss of  Rs.175000 in the Return of Income  at the time of redemption of tax free bonds, Please  guide me.

Thanks    

AI Summary

Tax treatment: for listed tax-free bonds, cost for capital gains excludes accrued interest; redemption loss compared to purchase price. For acquisition of listed tax-free bonds, the cost for capital gains purposes is the purchase price exclusive of accrued interest; the accrued interest paid to the seller is compensation for past interest and not part of the capital asset's cost. Interest received on these specified bonds is tax-exempt and may be shown as exempt income. On redemption at face value, capital loss should be computed by comparing redemption proceeds with the purchase price paid for the bond (here the premium purchase price), not the total outlay including accrued interest.