Taxation of Zero Coupon Bonds:  

• Zero coupon bonds means to include the following:  

1. Bond issued by an infrastructure capital company/ infrastructure capital fund/ public sector company on or after 1^st June’ 2005.

2. Bond in respect of which no payment and benefit is received/ receivable before maturity or redemption from infrastructure capital company/ infrastructure capital fund/ public sector company;

3. Bonds which Central Govt. may by notification in the Official Gazette specify in this behalf.

• Maturity and Redemption of Zero coupon bonds to be treated as Transfer:  

The benefit of Zero coupon bond materializes only on maturity or redemption, consequent to which same will be treated as transfer.  

• Transfer as defined above will be subject to Tax under the head Capital Gains:  

The profits arising on the transfer of zero coupon bonds shall be subject to Capital Gains tax subject to its assess ability as a Short term or a Long term Capital Asset. In case it being recognized as a Short term capital asset the same will be taxable as per assessee specific income tax slab rates, but if it is recognized as a long term capital asset then assessee will have the either of the two options to pay minimum tax u/s 112(1):  

Option I:  20% of long term capital gain after indexation of the cost of such bonds;

Or  

Option II: 10% of long term capital gains before indexation of the cost of such bonds;

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