How is tax avoided through Bond washing transactions?

Tax Avoidance Through Bond Washing Transactions:

1. Definition: Bond washing is a transaction where an investor sells a bond shortly before the coupon payment date and then repurchases it shortly after the coupon payment date. The goal is to receive the interest payment (coupon) without having to pay tax on it.

2. Mechanism of Tax Avoidance:

2.1 Timing: By selling the bond just before the coupon payment date, the seller receives the interest payment without holding the bond on the record date. This allows them to avoid paying tax on the interest income.

2.2 Repurchase: After receiving the interest payment, the investor repurchases the same bond, effectively resetting the holding period. Since the bond is repurchased after the ex-dividend date, the investor can claim a capital loss on the sale, which can be used to offset other capital gains.

3. Example:
Suppose an investor purchases a bond for Rs. 100,000 and receives an interest payment of Rs. 5,000. If the investor sells the bond for Rs. 100,000 just before the interest payment date and repurchases it for Rs. 100,000 just after the interest payment date, they receive the Rs. 5,000 interest payment tax-free. Additionally, they can claim a capital loss of Rs. 5,000 on the sale, which can be used to offset other capital gains.

4. Tax Avoidance Consequences:

4.1 Legal and Regulatory Issues: Bond washing transactions are considered tax avoidance schemes and are subject to scrutiny by tax authorities. Engaging in such transactions can lead to penalties and legal consequences.

4.2 Impact on Tax Revenue: Tax avoidance through bond washing transactions reduces the tax revenue collected by the government. This can have implications for public finances and government spending.

5. Conclusion:
Bond washing transactions are a form of tax avoidance where investors sell and repurchase bonds to receive interest payments tax-free. While these transactions may provide short-term tax benefits, they are subject to legal and regulatory scrutiny and can have long-term implications for tax revenue. Investors should be aware of the tax consequences and risks associated with bond washing transactions.