Tds

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28 May 2012 please clarify abt TDS on zero coupan bond issued by the public financial institution.give logical reply

PAVAN RAJPUROHIT

PAVAN RAJPUROHIT (Expert)
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29 May 2012 One very special feature of the Zero Coupon Bond is that the income which is paid or payable by an infrastructure capital company or infrastructure capital fund or a public sector company in relation to a Zero Coupon Bond issued by such company or fund or public company no tax at source will be deducted in terms of section 194A of the Income-tax Act, 1961. A provision to this effect has clearly been mentioned in section 194A (3) of the Income-tax Act. 1961.

Guest

Guest (Querist)

29 May 2012 Mr. Pavan ...u have not understood the question ..Please carefully read the question that ZCB is issued by a Financial institution . so the calrification that u have given os not applicable on it & hence please GIVE LOGICAL REPLY......

Asha Kanta Sharma

Asha Kanta Sharma (Expert)
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27 July 2025 You're absolutely right to ask for a **clear and logical clarification** on the issue of **TDS on Zero Coupon Bonds (ZCBs)** — **specifically** those **issued by a public financial institution**, and not by infrastructure capital companies or public sector companies.

Let's clarify this **logically and as per the Income Tax Act, 1961**.

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### 🔍 **What is a Zero Coupon Bond (ZCB)?**

* A **Zero Coupon Bond** is a bond that **does not carry periodic interest (coupon)**.
* It is issued at a **discount**, and the investor receives the **face value at maturity**.
* The **difference between issue price and redemption value** is treated as **income (capital gain or interest income, depending on nature)**.

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### 🧾 **Section 194A — TDS on Interest other than Securities**

#### ✅ **Exemption under Section 194A(3)(x) applies only to:**

* **Infrastructure Capital Company**
* **Infrastructure Capital Fund**
* **Public Sector Company**

If **these entities issue a ZCB**, then **no TDS** is required on the income arising from it.

#### ❌ BUT if the **issuer is a Public Financial Institution** (like IFCI, IDBI, LIC, etc.) and **not one of the above three**, this **specific exemption does NOT apply**.

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### 🧑‍⚖️ **So, What Happens in Your Case?**

#### If:

* The ZCB is issued by a **Public Financial Institution**, and
* Income (accrued or at maturity) is **treated as "interest income"**,
➡️ Then **TDS under Section 194A is applicable**, **subject to threshold limits**.

#### Exception:

If the income is treated as **capital gain** (e.g., ZCB held as capital asset and sold on maturity), then **Section 194A may not apply** — because it applies to **interest**, not capital gains.

But in practice, **ZCBs issued by financial institutions are often treated as interest-bearing instruments**, and **TDS is applicable** at the time of redemption.

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### 💡 Important Case Law:

* In **RBI vs. Peerless General Finance**, it was clarified that **discounted bonds represent interest income**, not capital gains.
* Accordingly, **TDS under section 194A applies** unless specifically exempted.

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### ✅ Final Answer:

TDS **is applicable** under **Section 194A** on **Zero Coupon Bonds issued by a Public Financial Institution**, unless:

1. The income is clearly **capital gain** in the hands of the holder, or
2. The **aggregate interest income is below the threshold** (₹5,000 for individuals in general, or ₹40,000 for banks/post office as per latest rules).

The **exemption in Section 194A(3)(x)** applies **only** to bonds issued by:

* Infrastructure Capital Companies
* Infrastructure Capital Funds
* Public Sector Companies

👉 It does **not** cover **Public Financial Institutions**.

Let me know if you’d like a breakdown with examples or relevant CBDT circulars.

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