Meaning of Zero Coupon Bond under Income-tax
Introduction
Zero coupon bond means the bonds issued by the Infrastructure Capital Company (or Fund), Infrastructure Debt Fund, Public Sector Company or Schedule Bank The Zero Coupon Bonds are notified by the Govt. if issuer files an application in this regard and it satisfies the prescribed conditions.
1. About
1.1. What is Zero Coupon Bond?
Zero Coupon Bond means a bond issued by the following entities on or after June 1, 2005 and in respect of which no payment or benefit is received or receivable by the investor before maturity:
(a) Infrastructure Capital Company
(b) Infrastructure Capital Fund
(c) Infrastructure Debt Fund
(d) Public Sector Company
(e) Schedule Bank
Such Zero Coupon Bonds should also be notified by the Central Government in the Official Gazette. As of now 16 Zero Coupon Bonds have been notified by the Central Govt., i.e., 10 Years Deep Discount Bonds issued by REC, Bhavishya Nirman Bond issued by NABARD, etc.
1.2. How Zero Coupon Bonds are notified?
In view of the guidelines, prescribed by Rule 7 of Income-tax Rules, an application shall be made by the issuer in Form 2 at least 3 months before the date of issue of such bond. Such application cannot be made in respect of bonds to be issued beyond a period of 2 financial years immediately following the financial year in which such application is made. The application shall be furnished electronically either under a digital signature or electronic verification code (EVC).
The application made in Form No. 2 shall be disposed of within a period of 6 months from the end of the month in which such application was received.
1.3. What are the documents to be submitted for notification of zero-coupon Bond?
Every application shall be accompanied by the copy of incorporation certificate or copy of registered trust deed or copy of relevant Act under which the applicant has been incorporated, as the case may be.
1.4. What are the conditions to be satisfied for notification of zero-coupon Bond?
The zero-coupon bonds shall be notified by the Govt. if the following conditions are satisfied:
(a) The life of bond should neither be less than 10 years nor be more than 20 years
(b) The applicant has an investment-grade rating from at least two credit rating agencies
(c) Necessary arrangement has been made by the applicant for listing of zero coupon bond in a recognised stock exchange in India
(d) If applicant is an Infrastructure Capital Company/Fund or Infrastructure Capital Fund, it furnishes an undertaking that the money realised from issue of zero coupon bond shall be invested in the following manner:
• 25% or more of money received shall be invested before end of financial year immediately following the financial year in which the bond is issued
• Balance of such money shall be invested within a period of 4 financial years immediately following the financial year in which the bond is issued.
(e) If applicant is an infrastructure debt fund, it furnishes an undertaking that a sinking fund shall be maintained for the interest accrue on all the zero coupon bonds subscribed and such interest shall be invested in Government security as defined under section 2(f) of the Government Securities Act, 2006.
The central government, after having satisfied about fulfilment of conditions, shall specify the bond by notification in official gazette, which shall contain the following particulars:
(a) Name of the bond
(b) Period of life of the bond;
(c) The time schedule of the issue of the bond;
(d) The amount to be paid on maturity or redemption of the bond;
The discount; and
(e) The number of bonds to be issued
Where the issuer fails to fulfil the conditions, Central Government may reject the application after giving the applicant an opportunity of being heard.
It is to be noted that the Central Government shall have the power to withdraw the notification if the issuer doesn’t company with the aforesaid conditions after notification of zero-coupon bond.
1.5. What compliances are to be done after notification of zero-coupon Bond?
A certificate from a Chartered Accountant has to be submitted within 2 months from the end of each financial year in which the issuer of bonds was required to make investment or utilization, specifying the amount invested in each financial year in Form No. 3.
Where the issuer fails to fulfil this condition, the Central Government shall have the power to withdraw the notification.
References
Notification No. 28/2022, dated 06-04-2022
This article is general information and not tax advice. Provisions change. Confirm your position with a qualified professional before acting.