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JUST like aspirin became the forerunner for safe pain solutions for the masses, the Zero Coupon Bond proposes to be the forerunner in safe investing solutions for the investing masses mainly because they give you relief from the headache of taxes.
Although the Zero Coupon Bonds were to start after 1st of June 2005 various delays in notification by the Government has led to a delayed take off.
So what exactly is this wonderful tool?
Zero Coupon Bond means a bond, which is issued by any infrastructure capital company/ infrastructure capital fund or public sector company where payment and benefit in respect of such bonds is received or receivable only on maturity or redemption from the issuing company.
And what exactly makes it so wonderful?
Since the amendment of Section 2 (47) of the Income-tax Act, 1961 it has been clarified that profits from Zero Coupon Bonds will be taxed as capital gains. What this essentially means is that the profit received by an investor on maturity/redemption of Zero Coupon Bond would be treated as a capital gain if the holding period would be 12 months and above. The treatment of capital gains particularly from the point of view of duration of holding of Zero Capital Bond would be exactly like the shares held in a company or the units held in a mutual fund. Prior to this amendment, income from these bonds were treated as business income and taxed at regular rates.
Now, an income-tax of only 10% would be payable on the long-term capital gains derived by selling the bond. This however shall be applicable when the assesee does not take the benefit of Cost Inflation Index (CII) as per second proviso to section 48 of the Income-tax Act, 1961. However, if the tax payer is interested in taking into consideration the CII (which essentially means calculating the cost of the bond by taking into account the inflation) then the tax rate on long-term capital gains would be 20%.
So the choice is yours - 10% or 20%?
(The provisions of surcharge and education cess would also be applicable)
But, what if the holding period is less than 12 months?
These would be treated as short-term capital gains and would be added to the other income of the tax payer and tax will be chargeable based on the slab rates applicable to the tax payer. Thus, there is no separate rate of Income-tax in respect of short-term capital gain arising on selling Zero Coupon Bond.
What about TDS?
This is another special tax feature. The income which is paid or payable by an infrastructure capital company or infrastructure capital fund or a public sector company in relation to a Zero Coupon Bond, no tax at source will be deducted in terms of section 194A of the Income-tax Act, 1961.
But are these safe?
The road to becoming an issuer of a ZCB is not easy at all. The Government is very strict when it comes to giving permission for issue of Zero Coupon Bond. Moreover there are clear cut guidelines with reference to investment pattern of the money raised on these bonds. The conditions that need to be fulfilled are :
a. The guideline provides that an application shall be made in Form No. 5B by the company for any Zero Coupon Bond proposed to be issued by it.
b. Every application for notification of a Zero Coupon Bond shall be accompanied by a certificate of incorporation of said infrastructure company or a copy of the Trust Deed of infrastructure fund or a copy of the relevant Act for a public sector company which proposes to issue the Zero Coupon Bond.
c. This will be made at least three months before the date of issue of the Bond.
d. The issuing company needs to have an investment grade rating from at least two credit rating agencies.
e. Another important condition which is a must for all those who are going to apply for issue of Zero Coupon Bond is that they should make necessary arrangements for listing the Zero Coupon Bond in a recognised Stock Exchange of India.
f. Likewise, they shall furnish along with the application an undertaking that the money which is realised by them on issue of the Zero Coupon Bond shall be invested by them in the manner as prescribed in rule 8B of the Income-tax Rules, 1962.
g. The period of life of Zero Coupon Bond is not less than ten years and not more than twenty years.
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