Zero Coupon Bonds

What are Zero Coupon Bonds in India?

Zero-coupon bonds (ZCB), as the name suggests, do not pay any coupon interest payments to the bondholders. These bonds are also known as discount bonds as they are issued at a price lower than the face value (or par value) and are repaid at face value on their maturity dates. The return to the investor would be the difference between the face value of the bond and its purchase price.

For instance, if you purchase a zero-coupon bond in India having a face value of Rs 20,000 at Rs 18,000, then on its maturity date, you will receive Rs 20,000, with Rs 2,000 being your returns on the bond, on the maturity date of the bond.

In this guide, you will learn how zero-coupon bonds work, their benefits, risks and how they differ from regular coupon paying bonds.

How to Calculate the Yield to Maturity (YTM) of Zero Coupon Bonds?

The YTM is the rate of return received if an investor purchases a bond and holds it until maturity. The formula for the calculation of your returns is mentioned below:-

YTM = (FV/PV) ^ (1 / t) – 1

‘FV’ represents the future value of the bond, ‘t’ is the number of compounding periods and ‘PV’ indicates the present value or price of the bond.

Why Invest in Zero Coupon Bonds in India?

• Compounded Growth: As zero-coupon bonds are issued at a discount and fully redeemed at face value on the maturity date, investors benefit from compounded growth because of no periodic interest payments.
• Predictable Returns: These bonds offer a fixed payout on their maturity dates, thus allowing you to easily align your investments with your financial goals.
• Portfolio Diversification: Including zero-coupon bonds in your investment portfolio can provide stability to it and help in optimising your asset allocation strategy.
• No Reinvestment Risk: Reinvestment risk refers to the possibility of the investor not being able to reinvest coupon payments at the rate equivalent to their current rate of return. As zero-coupon bonds have no periodic interest payments, all returns are received on the maturity date. This eliminates the need for reinvesting the coupon receipts and thus, reduces the reinvestment risk for the bond

Who Issues Zero Coupon Bonds?

Zero-coupon bonds in India are usually issued by corporates, especially those active in the financial sector and infrastructure sector. The Government of India has not issued zero-coupon bonds after 1996.

What are the Risks of Investing in Zero-Coupon Bonds?

1. Interest Rate Risk

The market interest rates and bond prices are inversely related to each other. If interest rates rise, the value of the zero-coupon bond may fall. Note that the interest rate risk would be valid only for investors planning to sell their zero-coupon bonds before their maturity dates. Investors can eliminate the interest rate risk by holding these bonds till their maturity dates.

2. Liquidity Risk

Liquidity risk refers to the risk that an investor may not be able to find enough buyers to sell the bond in the secondary market before its maturity date. As a result, an investor may be forced to sell their zero-coupon bond at a lower price than its face value which reduces overall returns. To reduce this risk, one should invest in bonds online only after reviewing their trading volumes in the secondary market.

3. Credit Risk

Credit risk of a zero-coupon bond refers to the possibility of the bond issuer defaulting on its maturity repayments. Before investing, investors should check their credit ratings assigned by CRISIL, ICRA and other SEBI-registered credit rating agencies to evaluate the creditworthiness of these zero-coupon bonds.

Who Should Invest in Zero Coupon Bonds?

Zero-coupon bonds are ideal for investors who are not looking for periodic interest payments but are instead focusing on receiving a lump-sum payout on a future date.

Investors in the higher tax slabs can also consider zero-coupon bonds. The returns generated from zero-coupon bonds are derived solely from the capital gains; the returns do not include interest (coupon) income as zero-coupon bonds do not generate interest income. As the long-term capital gains (LTCG) derived from listed bonds are taxed @ 12.5%, zero coupon bonds offer higher tax efficiency than other bond types for investors in the higher tax slabs.

Zero Coupon Bonds vs Coupon Paying Bonds

Market & Regulation Trends

In June 2025, the National Bank for Agriculture and Rural Development (NABARD) got approval to issue zero coupon bonds to raise up to Rs 19,500 crore (US 2.3 billion). According to the CBDT notification 56/2025 dated 12 June 2025, the bond's maturity period is 10 years, 11 months, and 13 days. The bonds can be issued on or before March 2027.

Key Details of NABARD Zero Coupon Bonds (2025)

• Name of the bond - Zero Coupon Bond of The National Bank for Agriculture and Rural Development (NABARD)
• Maturity period of the bond - 10 years, 11 months, and 13 days
• Time schedule of the issue - To be issued on or before the 31st day of March 2027 of the bond
• Amount to be paid on maturity or redemption of the bond - Rs 19,500 crores
• Discount on the bond - Rs 10,349.625 crores
• Number of bonds to be issued - 19.50 lakhs

Other recent issuances include zero coupon bonds of Power Finance Corporation (PFC), which have a tenure of 10 years and 1 month and the public issue closes on 30 January 2026, offering 6.95% yield. In April 2025, Housing and Urban Development Corporation Ltd. (HUDCO) notified a 10-year zero-coupon bond issue of Rs 5,000 crore. 5 lakh bonds are to be issued on or before the 31st day of March 2027 of the bond. 

Zero Coupon Bonds in smaller denominations

According to SEBI Notification dated 18 December 2025, SEBI allows issuers to issue zero coupon bonds in smaller denominations of Rs 10,000 on a private placement basis - broadening participation in the corporate bond market.

Role of STRIPS in Zero Coupon Bonds

Separate Trading of Registered Interest and Principal of Securities (STRIPS) is a security created by way of separating the final principal payment and the coupon payment into separate securities. These separated cash flows are then sold as individual securities and it's a way to create zero-coupon bonds. However, these bonds are created out of existing securities only and are not issued through auctions. Further, being zero-coupon bonds, STRIPS have zero reinvestment risk and are attractive to retail/non-institutional investors.

Understand with an example-

A 3-year bond with a semi-annual coupon will have 6 coupon payments and 1 principal payment. This bond can be stripped into 7 different securities and sold.