Economy

IT rules amended to enable infra debt funds to issue zero coupon bonds

Shishir Sinha | Updated on: Apr 07, 2022
The infrastructure debt fund can issue zero coupon bonds (ZCB) apart from rupee denominated bonds or foreign currency bonds

The infrastructure debt fund can issue zero coupon bonds (ZCB) apart from rupee denominated bonds or foreign currency bonds | Photo Credit: TolikoffPhotography

Experts say such an amendment will help in mobilisation of resources in a tax efficient manner

The Income Tax department has amended rules to enable infrastructure debt fund and NBFCs to issue zero coupon bonds. Experts say such an amendment will help in mobilisation of resources in a tax efficient manner.

A new notification has added the word ‘infrastructure debt fund’ along with infrastructure company and public sector company. Accordingly, the infrastructure debt fund can issue zero coupon bonds (ZCB) apart from rupee denominated bonds or foreign currency bonds.

No periodic payments

The Reserve Bank of India (RBI) says ZCBs are issued at a discount and redeemed at par. No interest payments are made on such bonds at periodic intervals before maturity. These bonds are considered ideal for people who require funds at a specific period of time in the future, like children’s education or retirement or a planned tour.

Also, if one is not interested in watching the market trends and likes the comfort of the ‘invest and forget’ strategy, then she/he can consider ZCBs. Such bonds are also useful in securing a guaranteed return for a fixed time period.

ZCB can be issued in accordance with rule 8 B of the Income Tax Rules. Among other things, the rule prescribes the period of the bond as not less than 10 years and not more than 20 years. The fund should have an investment grade rating from at least two credit rating agencies. The bonds will be listed on stock exchanges.

Debt funds will be required to invest 25 per cent or more of money collected through ZCBs before the end of the financial year, immediately following the one in which the bond was issued. The remaining money will be invested in next four financial years.

Accrued interest

Debt funds shall also give an undertaking that a sinking fund will be maintained for the interest which will accrue on all the ZCBs subscribed, says the notification, adding that such interest shall be invested in Government security.

Investors in ZCBs may face interest rates risk if sold prior to the date of maturity. Its value is inversely related to the rise in the interest rates. In terms of taxation, investors in notified ZCBs are liable to pay only capital gains tax on maturity. Capital appreciation in such cases is the difference between the maturity price and purchase price of the bond.

Infra industry boost

Maulik Doshi, Deputy Managing Director (Transfer Pricing and International Tax) of Nexdigm, says the new rules would help smoothen the implementation process of issuance of ZCBs by IDFs and help the infrastructure industry raise funding through the new route. This would act as a booster for the industry. “Investing in ZCBs is preferred in view of deferred taxability and the law provides an option to offer income from ZCBs at 20 per cent with the benefit of indexation or at 10 per cent without indexation, whichever is more beneficial,” he said.

Published on April 07, 2022
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