Zero Coupon Bond under Capital Asset  :

Section 2(48) defines the expression ‘Zero Coupon Bond”. As per this definition, ‘zero coupon bond’ means a bond issued by any infrastructure capital company or infrastructure capital fund or a public sector company or a scheduled bank on or after 1st June, 2005, in respect of which no payment and benefit is received or receivable before maturity or redemption from such issuing entity and which the Central Government may notify in this behalf. Accordingly, the Central Government has specified the following bonds issued on or before 31.3.2009 as zero coupon bonds –

(i) 10 year zero coupon bonds of HUDCO, SIDBI, NABARD and IDFC;

(ii) 15 year zero coupon bonds of HUDCO;

(iii) 15 year zero coupon bonds of Power Finance Corporation; and

(iv) 10 year zero coupon bonds of National Housing Bank.

The Central Government has also specified the following bonds issued on or before 31.3.2011 as zero coupon bonds –

(a) Bhavishya Nirman Bond, a 10 year zero coupon bond of National Bank of Agriculture and Rural Development (NABARD), issued on or before 31.3.2011

(b) 10 year Deep Discount Bond (Zero Coupon Bond) of Rural Electrification Corporation Limited (REC) issued on or before 31.3.2011.

The income on transfer of a ZCB (not being held as stock-in-trade) is to be treated as capital gains. Section 2(47)(iva) provides that maturity or redemption of a ZCB shall be treated as a transfer for the purposes of capital gains tax. ZCBs held for not more than 12 months would be treated as short term capital assets. Where the period of holding of ZCBs is more than 12 months, the resultant long term capital gains arising on maturity or redemption would be treated in the same manner as applicable to capital gains arising from the transfer of other listed securities or units covered by section 112. Thus, where the tax payable in respect of any income arising from transfer of ZCBs exceeds 10% of the amount of capital gains before giving effect to the provisions of the second proviso to section 48 on indexation, then, such excess shall be ignored for the purpose of computing the tax payable.

The terms “infrastructure capital company” and “infrastructure capital fund” have been defined in section 2(26A) and 2(26B), respectively. For details, refer Chapter 1- Basic Concepts.