TDS Challenges: Impact on Small Bond Investors

The 10% TDS on listed bond coupons ensures tax compliance but has added complexity

- Vishal Goenka

Budget 2023 imposed a 10% TDS on coupon payments from listed bonds to ensure tax compliance, but it has caused unforeseen complications, especially for small investors and retirees who rely on predictable coupon income.

TDS collects tax at source of income distribution. For bonds, this means the coupon-paying entity deducts 10% as tax and deposits it with the government. While simple in theory, challenges arise in secondary market transactions.

When bonds are traded mid-cycle, the buyer compensates the seller for accrued interest. However, the entire coupon, with 10% TDS, is paid to the buyer, even for the period the seller held the bond. This leads to the buyer being taxed on the full coupon, creating cash flow discrepancies and reducing anticipated yields.

Challenges for retail investors

Small or retail investors often choose bonds for predictable returns, but TDS disrupts cash flow and complicates tax filings, requiring refunds for excessive deductions.