The income tax department changed the rules to allow infrastructure debt funds and NBFCs to issue zero-coupon bonds. Experts say such an amendment will help mobilize resources in a fiscally efficient manner.

A new notification added the word “infrastructure debt fund” as well as infrastructure company and public sector company. Accordingly, the infrastructure debt fund may issue zero coupon bonds (ZCB) apart from rupee denominated bonds or foreign currency bonds.

No periodic payments

The Reserve Bank of India (RBI) indicates that ZCBs are issued at a discount and redeemed at par. No interest payments are made on these bonds at periodic intervals prior to maturity. These bonds are considered ideal for people who need funds at a specific time in the future, such as the children’s education or retirement or a planned tour.

Also, if one is not interested in observing market trends and likes the comfort of the “invest and forget” strategy, then one can consider KBAs. These bonds are also useful for securing a guaranteed return for a set period of time.

ZCB may be issued in accordance with Rule 8B of the Income Tax Rules. Among other things, the rule prescribes the period of the bond as being at least 10 years and not more than 20 years. The fund must have a quality rating from at least two rating agencies. The bonds will be listed on the stock exchange.

Debt funds will be required to invest 25% or more of funds raised through KBAs by the end of the financial year immediately following that in which the bond was issued. The remaining money will be invested over the next four years.

Increased interest

Debt funds must also commit that a sinking fund will be maintained for interest that will accrue on all subscribed KBAs, the notification says, adding that such interest will be invested in state security.

Investors in KBAs may face interest rate risk if they are sold before the maturity date. Its value is inversely proportional to the rise in interest rates. For tax purposes, investors in notified KBAs are only liable for capital gains tax at maturity. The capital appreciation in such cases is the difference between the price at maturity and the purchase price of the bond.

Stimulation of the infra industry

Maulik Doshi, Deputy Managing Director (Transfer Pricing and International Taxation) of Nexdigm, said the new rules would help ease the process of implementing KBA issuance by IDFs and help the infrastructure sector raise capital. funds through the new path. This would act as a stimulus for the industry. “Investing in KBAs is preferable given the deferred taxation and the law provides the option of offering KBA income at 20% with the benefit of indexation or at 10% without indexation, depending on which is the more beneficial,” he said.

Published on

07 April 2022