Zero-coupon bonds in India

What a zero-coupon bond is

A conventional bond pays a coupon every year and returns its face value at the end. A zero-coupon bond skips the coupons: it is sold at a discount to face value and redeemed at face value, so the whole return is the difference between what you pay and what you get back. The Reserve Bank's FAQ on the government securities market puts it in one line, describing zero coupon bonds as bonds with no coupon payments, issued at a discount and redeemed at face value, and records that the Government of India issued such securities in 1996 and has not issued zero coupon bonds since. The same FAQ describes Treasury bills as zero coupon securities.

Because nothing is paid out before maturity there is nothing to reinvest and no coupon to be taxed year by year; if you hold to maturity the return is fixed on the day you buy. The flip side is that the price of a long zero-coupon bond moves more with interest rates than a coupon bond of the same maturity (see the price-sensitivity section), and that only a small set of issuers has used the structure in India.

Two instruments are easy to confuse with it. A 'cumulative' bond or NCD does pay interest, but compounds it and hands it over with the principal at maturity; legally and for tax it remains interest. And on the Social Stock Exchange a 'zero coupon zero principal' instrument is a donation receipt with no repayment at all, not an investment. Both are covered below.

How the return is computed

The yield of a zero-coupon bond is the single annual rate that grows the price into the face value over the remaining life: price × (1 + yield)^years = face value, so yield = (face ÷ price)^(1 ÷ years) − 1. A ₹1,000 face-value bond bought at ₹700 with exactly five years to run yields 7.39% a year; the same bond at ₹500 with ten years left yields 7.18%.

To run your own numbers use the bond yield calculator: enter the face value, the price you would pay, a coupon rate of 0%, the years to maturity and annual frequency. The tool rounds the life to whole periods, so for a bond with ten years and one month left enter 10 years and expect the result to sit a few hundredths above the exact figure. At issue, the issuer's own effective-yield table in the offer document is the number to rely on.

Issue documents quote an 'effective yield' computed on the actual days to maturity (Actual/Actual day count in PFC's case). A secondary-market quote for a listed zero-coupon bond is a price, not a yield, and a dealer may quote a yield on a different convention; recompute from price, face value and the exact maturity date before comparing two bonds.

What a retail investor in India can actually buy

Four wrappers carry zero-coupon economics in India, plus one that borrows the name. They differ in who issues them, how you get access and, most of all, how the gain is taxed.

The notified route is in use again, issue by issue. HUDCO told BSE and NSE on 21 April 2025 that CBDT notification S.O. 1744(E) of 17 April 2025 permits it to issue five lakh zero-coupon bonds of ten years and one month for ₹5,000 crore payable at maturity, which works out to ₹1,00,000 payable on each bond. A permission is not an issue, and HUDCO's letter does not say when or how it would place them. PFC did put a notified zero-coupon series inside a public NCD issue in January 2026, also at a ₹1,00,000 face value; it is the only public issue of a notified zero-coupon bond among the issuer documents we read.

The Social Stock Exchange's 'zero coupon zero principal' instrument shares the name but not the economics: a not-for-profit raises money, reports on outcomes and repays nothing. SEBI's board memorandum of April 2026 records that the minimum application was cut from ₹2 lakh to ₹1,000 with effect from 19 March 2025, and SEBI's circular of 15 April 2026 lets an issue proceed at 50% subscription where the exchange is satisfied the funds can be deployed meaningfully. SEBI's 2025-26 annual report counts five such listings raising ₹21.9 crore in the year. Treat it as philanthropy with disclosure, not as a bond.

A notified zero-coupon bond you could apply for: PFC's January 2026 Series III

Power Finance Corporation's Tranche I public issue (prospectus dated 9 January 2026, open 16 to 30 January 2026, secured, rated Crisil AAA/Stable among other ratings) offered five series. Series III is a zero-coupon NCD, and the table below sets out its terms as the prospectus states them.

Two things to take from it. First, the gain is ₹49,220 on a ₹50,780 outlay over ten years and one month, received as a single capital gain at maturity, whereas the same money in Series V would arrive as interest. Second, the ₹1,00,000 face value makes one bond a ticket of about ₹51,000, far above the ₹10,000 minimum of the coupon series, so position sizing is coarse and a sale before maturity depends on finding a buyer for whole bonds.

How zero-coupon bonds are taxed

The Income-tax Act, 2025 replaced the 1961 Act on 1 April 2026 and carries the zero-coupon rules over with new section numbers. Section 2(112) defines a zero coupon bond as one issued on or after 1 June 2005 by an infrastructure capital company or fund, an infrastructure debt fund, a public sector company or a scheduled bank, on which nothing is paid before maturity or redemption, and which the Central Government specifies by notification. That last limb is the whole point: without the notification an instrument is not a 'zero coupon bond' for tax, however it is marketed.

For a notified bond, section 2(109)(e) treats maturity or redemption as a transfer, so the gain is a capital gain rather than interest. Section 2(101)(b)(iv) makes a zero coupon bond a long-term asset once held for more than twelve months, and section 197(1)(b) taxes long-term capital gains at 12.5%. The table of cases with no deduction at source in section 393(4) (Sl. No. 7(c)(v)) covers payments by those issuers on zero coupon bonds issued on or after 1 June 2005, consistent with PFC's prospectus saying no tax is deducted for residents.

Everything that is not notified falls back on the CBDT's deep-discount rules. Circular 2/2002 of 15 February 2002 asks the holder to value the bond at market each 31 March and offer the year's accretion as interest; a sale before maturity is a capital gain measured from the last valuation date, so always short-term; redemption yields interest for the final stretch; and non-corporate investors holding up to ₹1 lakh of face value may instead be taxed on the whole discount at redemption. Circular 4/2004 of 13 May 2004 confirms that tax is deducted at source only at redemption. Circular 2/2002 applies the same treatment to STRIPS. Section 536(2)(j) of the 2025 Act keeps circulars issued under the repealed Act in force so far as they are consistent with it.

Price sensitivity: why a zero-coupon bond moves more

A bond's price sensitivity to yield rises with how far away its cash flows are. A zero-coupon bond has one cash flow, at maturity, so its duration equals its maturity, the longest possible for that term. In the five-year example above a one-percentage-point rise in yield cuts the price by 4.5%, against about 4.0% for a five-year bond paying a 7.39% annual coupon at par. At ten years the gap widens: a ten-year zero at 7% (₹508.35 per ₹1,000 of face value) falls 8.9% if its yield moves to 8%.

That cuts both ways. Held to maturity none of it matters, because you receive face value on the date. Sold early, the whole return rides on the price that day, and thin trading in these ISINs (notified zero-coupon bonds come in ₹1,00,000 lots, and PFC's series listed only in 2026) means a quoted price can be stale. The absence of coupons also removes reinvestment risk, which is the reason the RBI's FAQ gives for STRIPS appealing to retail and non-institutional investors.

How to find and buy one

Decide the wrapper first, because it fixes the tax: a Treasury bill, a STRIP, a notified zero-coupon bond and a cumulative NCD option are four different tax events for the same-looking cash flow. Then:

• For Treasury bills follow the Treasury bills in India guide: non-competitive bids through RBI Retail Direct or a broker's primary-market window, or the secondary market.
• For a notified zero-coupon bond, watch public issues on the NCD tracker and read the offer document for the words 'zero coupon' and for a CBDT notification among its material documents. After listing, search the ISIN on the NSE or BSE security page and check the last traded date before trusting the price.
• For STRIPS, ask the bank or primary dealer that holds your gilt account; stripping requests go through the custodian to the RBI's e-Kuber and STRIPS are not sold in auctions.
• Recompute the yield yourself from price, face value and the exact maturity date with the bond yield calculator at a 0% coupon, and compare it with a coupon bond of the same issuer and tenor after tax, not before.
• Count the costs of the route: brokerage and demat charges for exchange trades, platform fees for an online bond platform (OBPP fees compared), and the ₹1,00,000 face value that makes a single notified bond a ticket of ₹50,000 or more.
• Match the maturity to the date you need the money. The structure rewards holding to the end and penalises an early sale in a year when rates have risen.

Zero-coupon bond vs cumulative fixed deposit

Both pay you once, at the end. A cumulative bank deposit compounds a fixed rate and its interest is taxable as interest, with the bank deducting tax at source above the thresholds in the Act; a notified zero-coupon bond defers everything to a single capital-gain event taxed at 12.5% if held for more than twelve months. For a 30%-slab investor that difference in label can matter more than the difference in headline rate, and it is the reason these bonds exist.

Against that, a deposit returns its principal with no price risk and can usually be broken early with a penalty, while a zero-coupon bond carries the issuer's credit risk (AAA-rated public-sector issuers in the examples above, though a rating is dated), price risk if sold early and thin liquidity. For a horizon under a year the Treasury bill is the closer like-for-like comparison, and the T-bill guide makes it. For the taxable alternatives with coupons, see corporate bonds in India; for the wider sovereign menu, government bonds in India; for the general mechanics of holding and selling bonds, how to invest in bonds.