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Hello professor,
I have query on the above subject:-
1- Is accrued income scheme applicable only to govt bonds or even the Corporate bonds?
2- Why was there possible need of accrued income scheme if dividend is included in income tax computation on actual received basis rather than accrual basis? I do understand that the holder of the security would sell the security just prior to interest income due date and include the value of the accrued tax within the selling price. But going by the same principle, the additional tax liability on the buyer and the income tax benefit to the seller would have automatically brought down the selling price isn’t it?
For e.g. if security was worth $100, accrued interest $20, and tax liability on the interest of $6. => The selling price would have been not just $100 + $20, rather it would have been $100 + $20 – $6 = $114.Thanks.
ABHi Aamir
A few words of advice to pass the F6 paper – learn the rules and apply them! They are rules that are decided by people and put into statute, different people may have chosen different rules – so don’t ask why in tax but simply learn the rules and know how and where to apply them – that is where you must spend your study time!The scheme does apply to corporate bonds.
In respect of your calculations you are confusing what we actually do under the accrued income scheme with what the scheme is designed to prevent. The scheme only applies where the market value is quoted “cum” interest and you don’t know how the market value of a nominal amount of loan stock has firstly been determined.
Learn and apply the rules – pass the exam!
Good luck with your studies!
ps – not a professor just a chartered accountant who’s been teaching for 40 years
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