For NRIs, looking for lower risk, fixed income investments in India, deep discount bonds or zero coupon bonds could be a credible option. Here are 4 things they must know about them.
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What is a deep discount bond?
It is a bond issued by eligible government or private institutions for long tenures of 5-25 years.
No interest is paid before maturity.
Issuer promises a face value of the bond on maturity after the completion of investment period and gives a discount at the time of issuing the bond. This discount is generally the compounded interest amount for the investment period.
Liquidity through stock exchange
These bonds get listed on the stock exchange and provide liquidity to investors to buy and sell the bonds before maturity.
Different tax treatment
Unlike Indian residents, tax is deducted at source (TDS) for interest for NRIs. Representatives of NRIs empowered by Power of Attorney, can also buy these bonds.
Invest for low risk investment with tax-free income
Deep discount bonds work well for NRIs in the highest tax slab as the long term capital gain tax would be only 10% without indexation and 20% with indexation. The latter allows the impact of inflation to be factored in and effectively lowers the amount of taxable capital gains.
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