The Draft Income-tax Rules, 2026 have introduced a comprehensive compliance mechanism under Rule 7, laying down clear procedural and eligibility guidelines for notification of Zero Coupon Bonds (ZCBs). The rule primarily applies to infrastructure capital companies, infrastructure capital funds, infrastructure debt funds, and public sector companies seeking tax-recognised status for proposed zero-coupon bond issuances.
The framework aims to ensure regulatory oversight, investor protection, and disciplined capital deployment in infrastructure financing.
Application Timeline and Validity
Under Rule 7:
- Eligible entities must submit an application in Form No. 2 at least three months prior to the proposed date of bond issuance.
- Applications cannot be made for bonds proposed to be issued beyond two financial years following the financial year of application.
- The Central Government must dispose of the application within six months from the end of the month in which it is received.
This structured timeline ensures administrative certainty and avoids speculative long-term approvals.
Mandatory Documentation Requirements
Depending on the nature of the applicant entity, specific documents must accompany the application:
- Infrastructure capital companies/infrastructure debt funds / Government companies: Certificate of Incorporation under the Companies Act, 2013.
- Infrastructure capital funds: Registered trust deed under the Registration Act, 1908.
- Statutory public corporations: Copy of the relevant establishing Act.
This documentation ensures legal validity and authenticity of applicants.
Key Conditions for Government Notification
Before issuing a notification in the Official Gazette, the Central Government must be satisfied that the following conditions are fulfilled:
1. Bond Tenure
- Minimum life: 10 years
- Maximum life: 20 years
2. Credit Rating Requirement
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Investment-grade rating from at least two SEBI-registered credit rating agencies.
3. Mandatory Stock Exchange Listing
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Arrangement must be made for listing on a recognised stock exchange in India.
4. Investment Deployment Conditions
The issuing entity must undertake to deploy the funds as follows:
- At least 25% of funds before the end of the financial year immediately following the year of issue.
- Remaining funds within the four subsequent financial years.
5. Special Requirement for Infrastructure Debt Funds
- Mandatory creation of a sinking fund.
- Accrued interest must be invested in Government Securities under the Government Securities Act, 2006.
These safeguards aim to ensure that capital raised through zero-coupon bonds is channelled toward genuine infrastructure development.
Government Notification Details
Once approved, the Central Government will notify the bond in the Official Gazette specifying:
- Name of the bond
- Tenure
- Issue schedule
- Maturity/redemption amount
- Discount
- Number of bonds to be issued
The Government retains the authority to reject applications after providing an opportunity of being heard and may also withdraw notification if post-approval conditions are not met.
Annual Compliance and Certification
Issuing entities must submit an accountant-certified statement in Form No. 3 within two months from the end of each relevant financial year, confirming the amount invested as per deployment commitments.
Failure to comply may result in the withdrawal of the notification.
Legal Definitions Clarified
Rule 7 aligns definitions of:
- "Discount" and "Period of life of the bond" with section 32(d) of the Act.
- Infrastructure debt fund as notified under Schedule VII [Table 46] of the Act.
Policy Significance
Zero-coupon bonds remain a crucial instrument for long-term infrastructure financing. By introducing structured eligibility norms, investment deployment conditions, credit rating requirements and post-issuance compliance checks, Rule 7 strengthens transparency and fiscal discipline.
The proposed framework under the Draft Income-tax Rules, 2026 reflects the Government’s intent to balance tax incentives with robust regulatory oversight in infrastructure funding.
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