Zero-coupon bond: Difference between revisions

Because of this, zero coupon bonds subject to U.S. taxation should generally be held in tax-deferred retirement accounts, to avoid paying taxes on future income. Alternatively, when purchasing a zero coupon bond issued by a U.S. state or local government entity, the imputed interest is free of U.S. federal taxes, and in most cases, state and local taxes, too.▼

Zero coupon bonds were first introduced in the 1960s, but they did not become popular until the 1980s. The use of these instruments was aided by an anomaly in the US tax system, which allowed for deduction of the discount on bonds relative to their par value. This rule ignored the compounding of interest and led to significant tax-savings when the interest is high or the security has long maturity. Although the tax loopholes were closed quickly, the bonds themselves are desirable because of their simplicity.{{cn|date=January 2020}}▼

In India, the tax on income from deep discount bonds can arise in two ways: interest or capital gains. It is also a law that interest has to be shown on an accrual basis for deep discount bonds issued after February 2002. This is as per CBDT circular No 2 of 2002 dated 15 February 2002.{{cn|date=January 2020}}▼