UNDERSTAND ZERO COUPON BOND

Generally, bonds are issued at face value and a fixed interest is paid on them. But in case of Zero-Coupon Bonds (ZCB), no interest is paid to the holder. Rather, such bonds are issued at a heavy discount on the face value of the bond. On maturity, the bondholder gets back the face value of the bond. These bonds are therefore, also known as ‘Discount Bonds’. For example: - Suppose Face Value of the bond is Rs. 150 to be matured after 5 years. It is issued at Rs. 100. Thus, the bondholder initially pays Rs. 100. After 5 years, he will get back Rs. 150 

Accounting treatment	The Accounting entries issue of ZCB’s, amortization of discount and redemption in the books of the issuer & investor  as per Ind AS 109 are given below: ZCB with FV of Rs. 150, maturing in 5 years is issued at Rs. 100, and the ZCB are redeemed at end of Year 5 at 150. The Discount must be amortized over the life of the bond based on the discounting factor. In the hands of issuer, Interest expense will be booked and in the hands of investor, interest income will be booked in profit & loss account.
	Issuer	Investor
Tax Treatment	Interest expense is allowed on pro data basis and not based on accounting entry based on discounting factor.	(i)Interest Income booked in the books to be completely ignored. (ii) In case of holding less than 12 months then Short term capital gain taxable at normal slab rate. (iii) In case of holding more than 12 months, then Long term capital gain taxable @ 10% without indexation.