Capital Gain Computation - u/s. 50AA can apply in Foreign Bonds - Listed or Unlisted in US

[PRIYAM KHAMBHATA]

Respected Sir

Thank you for guidance me on Issue Id 121016.

Further, In reference to the opinion given against Issue Id 121016, I have a question or doubt and which has to confirm and clear that, as per your given opinion on Specified Mutual Fund ie US Listed ETFs', Special Provision for Computation of Capital gain on sold Foreign US Listed ETFs', provision of section 50AA do not apply. But it may kindly be noted that my client has sold US Bond also. Therefore, my query regarding sold out of

VANGUARD SHORT TERM BOND - BSV

VANGUARD TOTAL BOND MARKET - BND

Please guide me that whether, above stated US bonds are covered under Market Linked Debentures as US unlisted or listed bonds), In this regards, the provision of section 50AA - Special provision for computation of capital gain on sold of Foreign Bonds will apply.

Thanks

[Sanjeev Agarwal]

In my considered opinion, Section 50AA should not apply to the sale of Vanguard Short-Term Bond ETF (BSV) or Vanguard Total Bond Market ETF (BND) merely because their underlying investments consist predominantly of bonds.

The crucial test under the Income-tax Act is the nature of the capital asset transferred, not the nature of the underlying assets held by that investment vehicle.

BSV and BND are U.S.-listed Exchange Traded Funds (ETFs). An investor purchasing these securities acquires units/shares of the ETF, and does not directly own the underlying bonds held by the fund. The ETF itself is a collective investment vehicle, whereas the underlying bonds remain the property of the fund.

A Market Linked Debenture (MLD) is a debt instrument issued by an issuer, where the return or redemption value is linked to the performance of a market index, security, commodity, interest rate, or another specified benchmark. BSV and BND are not debentures, nor are they structured notes or market-linked debt instruments. They are simply ETF units listed on a recognized U.S. stock exchange.

Accordingly:

• Sale of U.S. Bond ETF units (BSV/BND) = Sale of Bonds.

• Bond ETF units = Market Linked Debentures.

Therefore, the mere fact that the ETF's portfolio consists of bonds does not convert the ETF units into bonds or market linked debentures for the purposes of Section 50AA.

However, if the client had directly purchased and sold U.S. corporate bonds, government bonds, or structured notes, a separate examination of the relevant provisions would be required.

Conclusion: Based on the facts provided, Vanguard Short-Term Bond ETF (BSV) and Vanguard Total Bond Market ETF (BND) should not be regarded as Market Linked Debentures. Consequently, Section 50AA should not apply solely because these ETFs invest in bonds, subject to verification that the securities sold were indeed ETF units and not direct bond holdings.

AI Summary

ETF units are distinct from underlying bonds, so Section 50AA does not apply solely because bond-heavy funds are sold.
BSV and BND are described as U.S.-listed ETF units rather than direct bond holdings, debentures, structured notes, or market-linked debt instruments. The relevant asset is the security transferred, not the nature of the ETF's underlying investments. Therefore, the bond-heavy composition of these ETFs does not by itself bring their sale within Section 50AA. Direct sales of U.S. corporate or government bonds, or structured notes, would require separate examination, subject to verifying that the securities sold were ETF units.