The Finance Act, 2005 has introduced the procedure regarding the taxation of the income on the Zero Coupon Bonds being issued on or after 1.6.2005. The provisions are as under:
(1) Meaning of zero coupon bond [Section 2(48)]:
“Zero coupon bond” means a bond—
(a) issued by any infrastructure capital company or infrastructure capital fund or infrastructure debt fund or public sector company on or after the 1st day of June, 2005;
(b) in respect of which no payment and benefit is received or receivable before maturity or redemption from infrastructure capital company or infrastructure capital fund or infrastructure debt fund or public sector company; and (c) which the Central Government may, by notification in the Official Gazette, specify in this behalf [For Guidelines for notification of Zero coupon bond, See Rule 8B].
- The expressions “infrastructure capital company” and “infrastructure capital fund” have been defined in section 2(26A) and 2(26B).
- The expression “infrastructure debt fund” shall mean the infrastructure debt fund notified by the Central Government in the Official Gazette under section 10(47).
(2) Maturity and redemption of zero coupon bond to be regarded as a transfer [Section 2(47)]:
As per clause (b) above, the payment of and benefit from zero coupon bond shall be received or receivable from the issuing company/fund only at the time of maturity or redemption. Consequently, clause (iva) has been inserted in section 2(47) to provide that the maturity or redemption of a zero coupon bond shall be regarded as a transfer.
(3) Transfer of zero coupon bond will be subject to capital gain tax:
The profits arising on the transfer of such zero coupon bond shall be chargeable under the head “capital gains.” Further, section 2(42A) has been amended to provide that if such zero coupon bonds are held for not more than 12 months, such capital asset shall be treated as short-term capital asset and hence shall be subject to short-term capital gain. On the other hand, where these bonds are held for more than 12 months, such capital gain shall be treated as long-term capital gain.
(4) Taxability of long-term capital gain from zero coupon bond:
The proviso under section 112(1) has been amended to include zero coupon bonds. Therefore, where the tax payable in respect of any income arising from the transfer of a long-term capital asset being zero coupon bonds exceeds 10% of the amount of capital gain, before giving effect to the provisions of the act.
www.lawyersclubindia.com/unabsorb