Zero-Coupon Bonds in India: No Coupons, No Reinvestment Risk, Interesting Taxes
A zero-coupon bond makes one promise: pay ₹X today, receive face value on a fixed future date. No coupons, nothing to reinvest, no cashflow admin. The whole return is the discount. That makes zeros the cleanest instrument in fixed income and, in India, the one whose tax treatment depends most on structure. Both halves matter.
The good half
The YTM you buy is the YTM you get. A coupon bond’s realised return depends on reinvesting every coupon at unknown future rates, which is YTM’s hidden assumption. A zero held to maturity has nothing to reinvest, so the purchase yield is locked. For goal-dated money, ₹10L in March 2031 and not a rupee less, nothing else matches a sovereign zero.
Maximum duration per year of maturity. A zero’s duration equals its maturity, so a 10-year zero swings like a 13-year coupon bond. Deliberate rate bulls want that. Accidental holders learn about it the hard way. Check any zero in the duration calculator before sizing a position.
No idle-cash drag. Coupon investors habitually let payouts sit in savings accounts. A zero compounds internally at the purchase yield by construction.
Where to find zeros in India
| Instrument | Tenor | Credit | Access |
|---|---|---|---|
| T-bills | ≤364 days | Sovereign | Weekly auctions |
| G-sec STRIPS | Any coupon date out to 30+ yrs | Sovereign | NDS-OM or primary dealers, see the full guide |
| Notified zero-coupon bonds | Issue-specific | PSU/infra issuers (REC, NABARD and similar, historically) | Secondary market, occasional issues |
| Cumulative NCD series | 1–10 yrs | Corporate | Public issues, economically zero-like |
| Deep-discount secondary bonds | Varies | Varies | Low-coupon bonds trading far below par |
The sovereign row is the workhorse: T-bills for short horizons, STRIPS for long ones. Corporate cumulative paper is zero-shaped, but it puts all your credit exposure on one future date. A bond that pays nothing until the day it must pay everything deserves a stricter credit standard, not a looser one.
The tax half, worth reading before you buy
Structure matters enormously here, and it’s where generic advice goes wrong.
T-bills. The gain at maturity is taxed at slab, always short-term. Simple.
Notified zero-coupon bonds, meaning those formally notified under the Income-tax Act. The redemption gain is treated as a capital gain, so a listed one held beyond 12 months attracts the 12.5% LTCG rate. This is the structure that makes long zeros useful to high-slab investors, since the whole return can ride at 12.5% instead of slab.
Cumulative NCDs. The maturity payout above face is generally interest income at slab. The zero-like shape does not buy capital gains treatment, and distributors blur this constantly.
Deep-discount secondary purchases and STRIPS. Treatment turns on the instrument and how you hold it. Selling a listed security before maturity is a capital gain, while positions held to redemption sit in technical territory.
The summary worth carrying: the economics of a zero are universal, but its taxation is a per-instrument fact you verify from the information memorandum, and from a CA at size, before buying. The gap between “12.5% on everything” and “slab on everything” can be 200+ bps of post-tax yield on identical cashflows.
A worked example of why high slabs care
Take a 30% slab investor, a 6-year horizon and ₹10L. A 7.1% coupon bond taxed at slab on every coupon nets about 4.9%. A notified listed zero bought to yield 6.9%, a lower pre-tax number, has its entire return taxed once at 12.5% plus cess at maturity, landing near 6.1% annualised with tax deferral along the way. The lower yield keeps considerably more money. Model your own case in the FD vs bond calculator, entering the zero as a 0%-coupon bond.
FAQ
Are zeros riskier than coupon bonds? Same credit, more duration, so more price volatility per year of maturity and no reinvestment risk. Held to maturity, a sovereign zero may be the least risky way to hit a dated target.
Why don’t more people use them? Supply is sparse outside T-bills and STRIPS, there’s no income to show for years, and “earning nothing” until maturity sits badly with most people. That neglect occasionally shows up as a pricing opportunity.
What about Sukanya or PPF-style products? Different category: administered, capped and locked. Zeros are market instruments, with any size, any date and the ability to trade. They complement each other rather than compete.
Educational content, not investment advice. Tax rules current for FY 2026-27 to the best of our knowledge, but verify with a professional before acting. See the full disclaimer.