TDS calculation for zero coupon NCDs

Hello everyone,

I am seeking assistance regarding the calculation of TDS on zero coupon bonds with a term of 5 years, which are maturing this year.

As we will be receiving principle + interest for the past 5 years on maturity, my query pertains to whether TDS will be calculated on the complete interest accumulated over the past 5 years or solely on the interest earned for this year.

If anyone has knowledge or experience in this area, I would greatly appreciate your guidance.

Thank you in advance.

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Where is TDS deducted/withheld on maturity of zero-coupon bonds? :thinking:

AFAIK, this is not accurate.
One receives the face-value of the zero-coupon bond upon its maturity.
(“zero coupon” = no interest.)

As the zero-coupon bond was initially purchased at a discount,
the difference between :

  • the initial purchase-price
  • and the current face-value received upon maturity

…is deemed as the capital gain.

As the zero-coupon bond was held over 5 years in this case,
it will be classified as long-term capital gain (LTCG).

One needs to declare and pay LTCG-tax on it accordingly in the financial year in which it matures.

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Thank you for your response, and I apologize for not providing all the necessary information initially.

The bond I am referring to has a face value of Rs. 1000, and upon maturity, it provides a premium of Rs. 585.3 per NCD.

So will it be treated the same way you explained above?

Sorry, i am more confused now. :sweat_smile:

Is it a zero-coupon NCD (as mentioned in the title of this topic-thread)
or is there a coupon-rate associated with it ?

The taxation depends on whether the income is received as interest (a non-zero coupon-rate) or as capital-gain (zero coupon-rate).

Sorry for the confusion :sweat_smile:. The coupon rate of the bond is 0%.

FYR, Here’s the ISIN code of the bond: INE804I076Y2

Finally. i think i have some clarity now.
This is ECLFINANCE-NH series IV issued in 2013, and maturing in 5 years i.e. in Aug 2023.
Source: [1] [2]

This is a cumulative NCD i.e. income is considered interest and not capital gain.
Source: Did you know? Cumulative interest earned on NCDs is interest income, not capital gains

In this context, the original query is also clear now…

Section 193 of the IT-act mentions that
TDS will not be withheld if the interest to be paid in the financial year is within INR 5000.

In the case of cumulative NCDs,
i believe the entire amount of cumulative interest will be considered
as being paid in the financial year (in the year when it matures),
and hence TDS will be withheld if cumulative interest exceeds INR 5000.

However, irrespective of the TDS withheld,
it appears that the actual tax liability may depend on
the accounting method one uses for one’s entire finances (not just the NCD income).

  • cash accounting method
    • tax deferred and paid when finally the accrued interest is received.
  • mercantile accounting method
    • tax calculated and paid annually when earned, even if not yet received.

Source: NCD (Non Convertible Debentures) - Who can invest? - BasuNivesh

So. based on the accounting method one follows,
one may be able claim any additional tax withheld as TDS,
while later filing Income Tax Returns for the year.

PS: I am not a CA. The above is not financial advice. Please consult a CA for definitive information.

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Thank you very much for the detailed information :blush:

Hi cvs,

please let us know how to search for offer document from sebi or any other source with just knowing the ISIN.

Thank you!

One approach is to…

1. First search online for the Bond’s ISIN
to find the issuing-company and the date-of-issue.

For example , here is the page with details of INE804I076Y2 on NSE’s website.

[ Source ]

2. Subsequently, one can search for the prospectus on SEBI’s website
containing the name of the issuing-company
published a couple months before the date-of-issue.

[ Source ]

@Dinesh_Mehnani I use this website to get details of the bond using ISIN:

Thanks a ton! @cvs and @Rohit_Vernekar