Senior citizens looking to invest in guaranteed income instruments can explore zero-coupon bonds. These bonds offer guaranteed income at maturity, typically 10 years and above. Zero-coupon bonds are issued at a discount on their face value, which means they are issued at a value lower than what is written on the bond’s face.

For example, in a zero coupon bond, if its face value is Rs 1,000, it is issued at a discount, say Rs 900, with a promise to pay face value (Rs 1000). The investor does not get a regular interest, but the total value is returned at maturity. Thus, the difference amount of Rs 100 is paid on maturity, the discount provided at the time of purchase. A coupon means interest, so a zero coupon bond means no coupon or interest.

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What Are The Benefits Of Investing In These Bonds?

Guaranteed Income: These bonds provide risk-free guaranteed income, which can be suitable for senior citizens who prefer less risky instruments.

Liquidity: These bonds offer a guaranteed return at maturity. However, if one needs money before maturity, one can sell the bonds in the secondary market. So, these can be liquidated in case of an urgent need.

Interest Payment: If an investor does not seek a regular income, zero coupon bonds could be an option where the full amount is paid on maturity. There is no need to calculate annual interest for tax purposes.

Retirement Planning: The guaranteed income allows investors to plan their finances efficiently, giving them more control and ensuring proper financial planning.

However, like every other financial instrument, these bonds have a few cons that cannot be ignored.

What Are The Risk Involved In Investing In These Bonds?

The long-term nature of these bonds could make them risky for some investors. These bonds are affected by changes in interest rates. If the interest rate goes high, newer bonds will be issued at higher rates, and the value of the old bond with lower rates will decline. However, this is only when one sells them before maturity.

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How Are These Bonds Taxed?

These bonds are issued for the long term but can be sold before maturity. So, their gains or losses are subject to short- or long-term holding. It is important to note that the tax liability varies depending on the bonds’ holding period and whether they are notified or non-notified. For notified bonds, such as those from the National Bank for Agriculture and Rural Development (NABARD) and Rural Electrification Corporation Limited (REC), the profit/gains are classified under capital gains for income tax purposes. In contrast, gains from non-notified bonds are treated as interest income.

For Notified Bonds:

• If an investor sells them within 12 months of purchase, the profit or loss will be considered short-term capital gain/loss, and the investor will be subject to tax as per the tax slab and the tax regime one selects.
• If one sells these bonds after keeping them for more than a year but before maturity, the gains/losses will be treated as long-term capital gain/loss. In this case, the tax liability will be 10 per cent.

For Non-Notified Bonds:

Any gain from the non-notified bonds would be considered as interest income and will be taxed as per investor’s tax slab.

Anuj Kesarwani, a certified financial planner, chartered trust and estate planner, and founder of Zenith Finserve, explains that zero coupon bonds are taxable on maturity and do not qualify for indexation benefits.

Should Seniors Invest In Zero-Coupon Bonds?

One of the benefits of investing in zero-coupon bonds is that they offer a fixed return. This long-term instrument may not be helpful for seniors who want a regular interest income. However, those looking to diversify their portfolio with a debt instrument and having no requirement for regular income can explore it.

Kesarwani adds, “If you have a low to moderate risk tolerance and a clear idea of the amount you need and when you need it, and you don’t need any money from the bond before it matures, zero-coupon bonds can be a good choice. Just match the bond’s maturity date with your financial goal’s timeline”.

However, the buying decision will depend on individual requirements as no investment instrument can fit all, and if required, one must seek advice from investment advisors.