Friday, August 14, 2009


The government has permitted scheduled banks, including the state-owned banks, to issue zero-coupon bonds to meet long-term capital requirements. At present, only authorized infrastructure capital companies/funds or public sector companies were allowed to issue zero-coupon bonds under Section 2(48) of the Income Tax Act. According to the finance ministry, tax would not be deducted at source for bondholders. And for banks, the implied interest rate on these bonds would be allowed
as business expenditure on a “pro-rata basis”. Thus it would be attractive for bondholders and banks to subscribe and sell zero-coupon bonds. In terms of changes in the I-T Act, Section 238 would be amended to include banks in the definition of who can issue zero-coupon bonds. Zero-coupon bonds are issued at a discount to the face value. No interest is paid to bondholders. At the time of maturity, bondholders will receive the face value of the bond. For example, a bond with a face value of Rs. 100 may be issued at Rs. 85 for duration of two years. At the end of two year, the bondholders will get Rs. 100, implying an interest income of Rs. 15.


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