A bond-washing transaction is a transaction where securities are sold sometime before the due date of interest and reacquired after the due date is over. It is a practice of selling a bond just before it pays a coupon payment and then buying it back once the coupon has been paid. This practice is adopted by persons in the higher income group to avoid tax by transferring the securities to their relative’s friends in the Lower – Income group just before the due date of payment of interest.
It is a transaction where securities are sold sometime before the due date of interest and reacquired after the due date is over. In such a case, interest would be taxable in the hands- of – the transferee, who is the legal owner of securities. If this practice is not checked, interest is includible in the total income of the transferee, as interest is chargeable in the hands of the person who is a legal owner of securities on the due date of payment of interest. Normally, this practice may be adopted by an assessee in the higher tax slab. Assessee transferring the securities to their relatives/friends in the lower tax slab just before the due date of payment of interest to avoid tax.
Bond Washing referred to a type of transaction of securities where tax avoidance is aimed at. It can result in tax-free capital gains because after the coupon has been paid, the bond will sell for less. It is sometimes seen that securities are sold cum-dividend with an agreement to re-sell or re-transfer the securities with a view to avoiding tax, the transfer by selling cum-dividend securities might get extra sale price which would be capital profit in this hands, no liability to tax. We may say bond-washing is a form of tax evasion, whereby buyers and sellers may collude to benefit from tax avoidance, it has been banned through the practice still exists. It can be used with just about any type of bond issue that is configured to provide periodic coupon payments. The process is less likely to produce any benefits when the bond only pays off at maturity.
Bond Washing Transaction is a transaction where securities are sold sometime before the due date of interest and reacquired after the due date is over. Generally, it happens that securities earn interest on a half-yearly or a yearly basis on a specific date the interest on securities is payable to the person who holds the security on the date of accrual of the interest. In such a case, interest would be taxable in the hands of the transferee, who is the legal owner of securities. Taking advantage of this, some people sell their securities a few days before the due date of interest payment. In any event, the benefit received from utilizing what is considered at best to be an unethical strategy is often minimal and not worth the risk associated with being discovered and receiving some sort of punishment for engaging in the process.