Taxability zero coupon bond india

One example of such a notified zero-coupon bond is the Bhavishya Nirman Bond, being issued by the National Bank for Agriculture and Rural Development, which is currently available. These bonds have a face value of Rs20,, are being issued at a discount at Rs9, and will be redeemed at face value at the end of 10 years.

If one computes the inherent rate of interest in such bonds, it works out to only 7. However, the post-tax return on such bonds is a fairly decent 6. The difficulty that one faces in taking a decision to invest in notified zero-coupon bonds is due to the uncertainty caused by the direct taxes code DTC.


  1. Zero Coupon Bonds – Meaning & Tax Treatment.
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Though the draft DTC provides for taxation of discount on such bonds as capital gains, it does not have a concessional tax rate for long-term capital gains on zero-coupon bonds. The post-tax rate of return is, therefore, uncertain.

a) Meaning of ‘Zero Coupon Bond’ – Income Tax

One wishes there was clarity, certainty and stability in tax laws. Gautam Nayak is a chartered accountant. Your comments, questions and reactions to this column are welcome at feedback livemint. You are now subscribed to our newsletters. Internet Not Available. But potential tax implications get trickier with bonds purchased in the secondary market at a premium or discount—in other words, investors that paid more or less than the face value of the bond. Mutual funds that invest in bonds typically provide regular income from a portfolio of many securities. As a result, the tax on the income is dependent on the types of securities held by the fund.

Bond funds pass along the interest income and capital gains on their investments to shareholders, who are then taxed on the taxable portion of those distributions. The interest generated by bond funds is typically calculated daily, but paid out to investors monthly. How that income is taxed depends on the underlying investments that are generating that income. The income from taxable bond funds is generally taxed at the federal and state level at ordinary income tax rates in the year it was earned. Funds that exclusively hold U. Treasury bonds may be exempt from state taxes.

Interest income generated by municipal bond funds is generally not subject to federal taxes, and may also be exempt from state and local taxes if the bonds held by the fund were issued by the state in which you live. Before buying a fund, read its prospectus to determine whether interest from the fund is expected to be subject to federal, state, or local taxes. There are 2 ways investors could owe capital gains tax on a bond fund investment. First, there are the capital gains and losses generated by the fund manager, as he or she buys and sells securities.

Whether the profit from the sale of a bond in the fund is taxed at ordinary income tax rates or is eligible for a reduced capital gains rate is dependent on the same factors as explained above. These gains or losses are generally distributed to investors once or twice a year.

Zero Coupon Bonds - Meaning & Tax Treatment | CA Club

The fund company will account for how your total gain or loss is generated and will tell you which portion is attributable to long-term capital gains, short-term capital gains, and interest income—all of which will affect the amount of tax you owe. Secondly, when you sell shares of the fund itself, you'll incur a gain or a loss depending on your cost basis, the amount of your initial investment, and any reinvested dividends. Any capital gains are taxable, and any capital losses may generate a tax benefit. You may want to consult with your tax advisor to find out how the specifics of your individual tax situation may affect the tax treatment of income generated by your investments.

Like other investments, the tax owed on bonds and bond funds can be deferred by holding them in a tax-advantaged retirement account, such as a k or IRA.

How is long-term capital gain from Nabard bonds taxed?

If taxable bond funds or individual bonds are held in a tax-free account such as a Roth IRA, then the income from them would be free from federal taxes, provided certain requirements are met. Select from a variety of individual bond and bond funds that may meet your investing needs. Bonds or bond funds are fixed income investments that generally pay a set rate of interest over a fixed time period.

In general, the bond market is volatile, and fixed income securities carry interest rate risk. As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities. Fixed income securities also carry inflation risk, liquidity risk, call risk, and credit and default risks for both issuers and counterparties.


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  • b) Tax Treatment of Zero Coupon Bonds.
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  • Unlike individual bonds, most bond funds do not have a maturity date, so holding them until maturity to avoid losses caused by price volatility is not possible. Fidelity does not provide legal or tax advice. The information herein is general in nature and should not be considered legal or tax advice. Consult an attorney or tax professional regarding your specific situation. Votes are submitted voluntarily by individuals and reflect their own opinion of the article's helpfulness.

    Zero Coupon Bonds

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