Deep Discount Bonds

Deep Discount Bonds

A coupon is an interest guarantee attached to a debt instrument; the coupon rate is the interest rate, which the holder of that debt instrument will receive. As the name suggests, zero-coupon bonds have no coupon rate i.e. there is no interest to be paid out. Instead these bonds are issued at a discount to their face value (Simply put, in a fixed income instrument, the face value represents the par value/nominal value; it is the amount payable to the holder of the instrument on maturity). The difference between the discounted issue price and face value is effectively, the interest that investor earns. For example, if the face value of a zero coupon bond is Rs 1,000 and its issue price is Rs 900, then the difference between the two i.e. Rs 100 is the return for investor (i.e. 10 per cent rate of return).



A 10 Year BhavishyaNirman Bonds of National Bank for Agriculture and Rural Development (NABARD), Rural Electrification Corporation (REC) and National Housing Bank (NHB) are being issued as long term investment instrument, under Sections 2 (47)& 2(48) of Income Tax Act, 1961. All the above three institutions are Central Government Undertaking withAAA rating.

Nature of Holding

The bonds can be held in both physical as well as in dematerialised (demat) form.

Tax implications

In terms of tax implication, the maturity proceeds from these bonds attract no tax deduction at source. Instead, the said income i.e. difference between face value/purchase price and issue price, will be treated as capital gains and capital gains tax will be payable by the investor. At present the Long Term Capital Tax is 10% without indexation and 20% with indexation.

High Liquidity

These bonds are transferable and can be mortgaged. Therefore, in case, the investors require liquidity for a temporary period, the bonds may be pledged with the Banks for raising loans. The bonds can also be sold in the secondary Bond Market with the help of an intermediary/Broker. The Bonds are highly liquid due to following reasons. 1. All the three institutions are Central Government Undertakings 2. Tax efficiency (The gain will be treated as Long Term Capital Gain instead of interest income) 3. “AAA” rating by CRISIL and CARE.


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