The word “taxation” comes from Latin word “Taxio”. It means to determine the payable quantum on the estimate. So, a tax is the revenue collected by the government from persons and organizations under different taxing Act.
“There is wide scope to avoid tax by cum interest transaction and bond washing transaction”
Cum interest transaction
Generally interest on securities is given on a particular day at regular intervals. When interest on securities is received, it is added with the total income for taxation purpose. Sometimes to avoid tax on interest on securities some people sells or transfers their securities including interest to other people just before the due date. This type of interest is known as Cum Interest Transaction.
Bond washing transaction
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. This practice is adopted by persons in the higher income group to avoid tax by transferring the securities to their relatives friends in the lower – Income group just before the due date of payment of interest. 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 legal owner of securities on the due date of payment of interest.