What is zero coupon bond?
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What is a Zero Coupon Bond? A Zero Coupon Bond (ZCB) is a type of debt instrument issued at a discount to its face value but does not pay any periodic interest (coupon). Instead, investors earn a return when they redeem the bond at its full face value upon maturity. Key Features of Zero Coupon BondsRead more
What is a Zero Coupon Bond?
A Zero Coupon Bond (ZCB) is a type of debt instrument issued at a discount to its face value but does not pay any periodic interest (coupon). Instead, investors earn a return when they redeem the bond at its full face value upon maturity.
Key Features of Zero Coupon Bonds
✅ Issued at a Discount: Bought at a lower price and redeemed at full value.
✅ No Interest Payments: Unlike regular bonds, there are no periodic interest payments.
✅ Fixed Maturity Value: Investors receive a pre-determined lump sum at maturity.
✅ Government or Corporate Issuance: Can be issued by the government, public sector undertakings (PSUs), or private companies.
Example
If a Zero Coupon Bond has a face value of ₹10,000 and is issued at ₹7,000, the investor earns a return of ₹3,000 (₹10,000 – ₹7,000) upon maturity.
Taxation of Zero Coupon Bonds in India
📌 As Capital Gains (For Investors Holding as an Investment)
The difference between redemption value and purchase price is taxed as capital gains.
Short-Term Capital Gains (STCG) – If sold within 12 months (listed ZCBs) or 36 months (unlisted ZCBs), gains are taxed as per slab rates.
Long-Term Capital Gains (LTCG) – If held beyond the respective period, LTCG tax applies at 10% without indexation under Section 112.
📌 As Business Income (For Traders or Companies)
If ZCBs are held as stock-in-trade, the gain is taxable as business income under Section 28.
📌 Tax Deducted at Source (TDS)
TDS may be applicable under Section 193 when the bond matures if issued by a company or financial institution.
Government-Notified Zero Coupon Bonds
As per Section 2(48) of the Income Tax Act, ZCBs notified by the Central Government enjoy special tax treatment, where the gain is taxed only on maturity and not annually.
Conclusion
Zero Coupon Bonds are an attractive option for long-term investors looking for fixed returns. However, investors should consider capital gains taxation and TDS provisions while investing in these instruments.
See less1️⃣ General Provision for Deduction of Interest As per Section 36(1)(iii) of the Income Tax Act, 1961, interest paid on capital borrowed for the purpose of business or profession is allowed as a deduction from business income. However, if the borrowed capital is used to acquire a capital asset, specRead more
1️⃣ General Provision for Deduction of Interest
As per Section 36(1)(iii) of the Income Tax Act, 1961, interest paid on capital borrowed for the purpose of business or profession is allowed as a deduction from business income. However, if the borrowed capital is used to acquire a capital asset, special rules apply.
2️⃣ When is the Deduction Allowed?
✔️ If the capital is borrowed for acquiring a capital asset, the interest expense can be deducted, but the timing of deduction depends on the asset’s usage status:
📌 Before the asset is put to use:
Interest incurred up to the date when the asset is first put to use is not allowed as an immediate deduction.
Instead, it is capitalized and added to the cost of the asset.
This capitalized interest becomes part of the depreciable cost of the asset and is claimed as depreciation over time.
📌 After the asset is put to use:
Interest paid on the borrowed capital after the asset is put to use is allowed as a deduction in the year in which it is incurred.
3️⃣ Special Cases & Exceptions
💡 For House Property (Section 24(b))
Interest on capital borrowed for purchasing, constructing, repairing, or reconstructing a house property is deductible under Section 24(b) as follows:
✅ For self-occupied property: Up to ₹2,00,000 per annum.
✅ For let-out property: Full interest is deductible.
💡 For Capital Gains Computation
If capital is borrowed for acquiring a capital asset (not for business use), the interest paid before the transfer of the asset is added to the cost of acquisition under Section 48 while computing capital gains.
4️⃣ Illustration
🔹 Example 1 (Business Asset): A company borrows ₹50 lakh for purchasing machinery. The machine is installed after one year. The interest for the first year is capitalized, while later interest is deducted from business income.
🔹 Example 2 (House Property): Mr. X takes a home loan of ₹30 lakh at 8% interest. He can claim ₹2 lakh per annum under Section 24(b) if the house is self-occupied.
5️⃣ Conclusion
✅ Interest deduction depends on whether the capital asset is put to use.
✅ Before use – Interest is capitalized; After use – Interest is deductible.
✅ Special provisions apply to house property and capital gains computation.
Understanding these provisions ensures maximum tax benefits while acquiring capital assets using borrowed funds! 🚀
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