Tax experts said the ruling could lead to increased scrutiny of secondary debt transactions undertaken around coupon dates and potentially trigger fresh litigation.
“Over the years, it has been an established position that broken period interest forms part of the sale price and hence should be treated as capital gains. The ITAT decision holding the surplus on sale of NCDs as ‘interest’ has opened up ambiguity on the treatment of broken period interest,” said Kunal Shah, partner at Price Waterhouse & Co LLP. “The decision could increase tax litigation for foreign investors undertaking secondary NCD trades in India,” Shah added.
The tribunal said that the portion of the sale consideration linked to accrued returns could instead be taxed as interest income.
Tax experts said the ruling could have wider implications and may lead to greater scrutiny of transactions executed around coupon dates.
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The case involved a Singapore-based investor who sold NCDs of an Indian company five days after a coupon date. As a result, five days’ worth of accrued interest was embedded in the sale consideration. The investor treated the entire amount as capital gains and claimed an exemption under the India-Singapore tax treaty.
Tax authorities, however, declined to grant an exemption on the entire amount.The tax department carved out the portion attributable to the five-day period and taxed it separately, arguing that the amount represented interest income taxable under the India-Singapore tax treaty. The ITAT agreed with this position.
Tax experts said the ruling could also renew focus on how cross-border investors structure and time exits from Indian debt instruments.
“Also, the ITAT decision does not provide detailed reasoning for arriving at this conclusion and has not considered the relevant jurisprudence on this aspect. It would therefore be interesting to see how the ratio of this judgment gets applied in practice as part of tax audits,” said Shah.
Tax experts said transactions executed immediately after coupon dates, especially on a cum-interest basis, may now face additional tax exposure in India, even where the underlying capital gains are otherwise protected under a tax treaty. The ruling also introduces complexity around withholding obligations and income characterisation, areas that have historically seen divergent positions between taxpayers and tax authorities.
“While the longstanding dispute on the deductibility of broken period interest in the hands of purchasers has seen clarity, the taxability in the hands of sellers remains less settled, and this ruling is among the first to address the issue,” PwC said, adding that the tribunal did not examine in detail the treaty-based characterisation under the India-Singapore agreement, leaving scope for further litigation.
For foreign investors, the ruling underscores the need to reassess pricing, documentation and tax positions in secondary debt trades. For tax authorities, it signals continued scrutiny of embedded returns within financial instruments and their taxation in line with their underlying economic character.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)