Debentures :

A debenture is a document that either creates a debt or acknowledges it, and it is a debt without collateral. In corporate finance, the term is used for a medium- to long-term debt instrument used by large companies to borrow money. A debenture is thus like a certificate of loan or a loan bond evidencing the fact that the company is liable to pay a specified amount with interest and although the money raised by the debentures becomes a part of the company's capital structure, it does not become share capital. Senior debentures get paid before subordinate debentures, and there are varying rates of risk and payoff for these categories. Debentures are generally freely transferable by the debenture holder. Debenture holders have no rights to vote in the company's general meetings of shareholders, but they may have separate meetings or votes e.g. on changes to the rights attached to the debentures. The interest paid to them is a charge against profit in the company's financial statements. Return on Debentures: Interest Income: Return on debentures are fixed. Interest rates are attached to the Debentures to reflect the return on debentures. For example, SBI issued Rs 100 lakh of Rs 1000 each 11% Debentures to the public to raise money, it means SBI will pay interest of Rs 110 on holding one debenture (i.e 11% of 1100). Therefore 11% is the Return on Investment.

Capital Gain: Short term Capital Gain-If Debentures are sold within One year from the date of purchase at premium or above the purchase price then investor makes a short term capital gain OR hold it for more than one year and then sells it at premium or price above its purchase value , Debenture holder makes a Long term Capital Gain.

Debentures are generally classified in two broad categories

Convertible Debenture -Which can be converted into equity share after a specified period of time and interest rate is less as compared to the NonConvertible Debentures Which cannot be converted into equity shares and get matured after a specified period of time and earn higher rate of interest.

Tax implication on investment in Debentures:

Income from debentures can be divided in two heads: Income from debentures Income from Capital Gain Interest Income from Debentures: Fixed interest is earned on debentures depending on the nature of the debenture every year till its maturity. Income from interest on debentures is taxable and is added to Interest income in Total income and is Taxable as per Tax slab every year till its maturity. Capital Gain from Debentures: Short term Capital Gains in respect Debentures held for a period of not more than 12 months is added to the total income. Total income including short-term capital gains is chargeable to tax as per the relevant slab rates. Long-term capital gains in respect Debentures held for a period of more than 12 months will be chargeable u/s.112 at the rate of 20%. Capital gains would be computed after reducing the aggregate of cost of acquisition (as adjusted by cost ination index notied by the Central Government) and expenditure incurred wholly and exclusively in connection with transfer. An assessee will have an option to apply concessional rate of tax of 10% provided the long term capital gains are acquisition. computed without substituting indexed cost in place of cost of