Question

A, an individual, owns a widget business. A transfers this business to Newco in exchange for Newco stock worth $10 and 30-year bonds with a face and FMV of $90. How will the bonds be treated for tax purposes?

Answer 1

Taxability of bonds in the hands of Transferor A ( An individual) :

1. The interest income earned every year on bonds will be charged under the head income from other sources in the hands of A (an individual). { assuming the bonds are other than Zero coupon bonds}

2. Sale of bonds on maturity will be charged under the head capital gains of income tax act.

lets take an example :

Assume Mr A has sold the bonds for $ 100 after 1 year

How to Calculate Capital Gains;
Step 1: Start with the full value of consideration = $ 100

Step 2: Less Cost of acquisition = ($ 90)

Step 3: This amount is capital gain   = $ 10.

Note :

Full value consideration :The consideration received or to be received by the seller as a result of transfer of his capital assets.

Cost of acquisition : The value for which the capital asset was acquired by the seller.

(The defintion of capital asset includes Bonds .)