Which ITR form should you select when investing in bonds?

Bond investments generate two types of income. Firstly, interest income and capital gain or loss. You might not earn income under both heads. So the annual ITR form you file will vary.

Interest income is taxable as per the individual’s income tax slab rate, while capital gains are taxed as per the holding period of the bonds. Moreover, the tax on capital gains can be calculated as STCG or LTCG, depending on the holding period of the bond. Considering these factors while investing in bonds is important to ensure tax efficiency.

Income Tax Return is a form taxpayers file to report their income, deductions, and tax payments to the government. It is a mandatory annual requirement for all assessees who meet certain income thresholds the government sets. Filing an accurate and timely ITR is important to avoid penalties and legal consequences.

What types of ITRs forms can an individual file?

1. ITR-1 (SAHAJ): This form is for individuals who have income from salary, one house property, and other sources such as interest income or pension income, provided the total income is up to Rs 50 lakh.
2. ITR-2: This form is for individuals and Hindu Undivided Families (HUFs) with income from salary, multiple house properties, capital gains, and other sources apart from business or profession.
3. ITR-3: This form is for individuals and HUFs with income from salary, house property, capital gains, business or profession, and other sources.
4. ITR-4 (SUGAM): This form is for individuals, HUFs, and firms (other than LLP) who have presumptive income from a business or profession, i.e., income from the business or profession is computed on a presumptive basis.

So, there are 4 types of ITR forms available for an individual. Which one will you file if you have purchased a bond? Let’s understand that with an example.

Let’s say you purchase a corporate bond from Wint Wealth in an individual capacity. The bond has a face value of ₹1,000 and a coupon rate of 10.25%. If you hold this bond for one year, you’ll earn interest of ₹102.5 (10.25% of ₹1000). Suppose you hold it for over a year and sell it for ₹1050 before maturity. So the coupon/interest is taxable at your slab rate under the head of income from other sources, and the capital gain of ₹50 is taxable at 10% plus surcharge and cess. Here we will consider salary and profits from business and profession as two primary sources of income. 

Case 1: Individual Assessee

1. Primary sources of income – Salary 

• If your annual income is below 50 lakhs, you will file ITR 1. But if you are earning above 50 lakhs, you will file ITR 2.
• If you earn through business or a profession, you must file ITR 3 irrespective of whether your income is lower or higher than 50 lakhs. 

So, if you have purchased bonds and earned interest and capital gains, you must fill the above forms.

2. Primary sources of income – Business or Profession

• If you earn through a business or a profession, then irrespective of your annual income, you will file ITR 3. 
• If you are a sole proprietor or freelancer with income below 50 lakhs and have opted for the presumptive income, you must file ITR 4.

Case 2: HUF Assessee

• If you are a HUF, you cannot earn through salary. So business and profession will be your primary source of income. Now if you have earned through PGBP, it doesn’t matter what your annual income is or what other source of income you have, you will file ITR 3.
• However, if you have opted for presumptive income and your annual income is below 50 lakhs, you will file ITR 4, but if your income exceeds 50 lakhs, you will also have to file ITR3.

This table will help you better understand which ITR form you must fill out if you are an individual assessee.

*Note – This table has been prepared without considering presumptive income.

This table will help you better understand which ITR form you must fill out if you are a HUF.

*Note – This table has been prepared without considering presumptive income.

The Bottom Line

In conclusion, investing in bonds can be a beneficial option for generating income. Still, it’s important to consider the tax implications of both interest income and capital gains while making investment decisions. The choice of ITR form that an individual or HUF will file depends on their primary sources of income and the amount earned from those sources. Selecting the correct ITR form is crucial to avoid any errors or penalties. It’s always recommended to seek professional advice from a financial consultant before investing in bonds and filing tax returns. Additionally, taxpayers who have opted for presumptive income should consider the relevant ITR form before filing their returns.

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