Zero coupon bonds and T-bills
Bonds that pay no interest along the way: how the return is built in, and how each is taxed
Rules as in force on 16 October 2026
Verified 16 October 2026
For training and education only. Not investment advice.
Trainer notes
Ask the room how a bond that pays no interest can still earn a return. The answer is the whole deck: you buy below face value and are repaid the full face value. Treasury bills and STRIPS are both built this way.
A zero-coupon bond pays no interest along the way.
Your whole return is the gap between the discounted price you pay now and the face value you are repaid at maturity. There is nothing in between.
Trainer notes
Keep this up for a moment. Everything else follows: the lower the price for a given face value and maturity, the higher the return. Treasury bills and STRIPS are just specific zero-coupon instruments.
Four terms to know first
Face value
The amount repaid at maturity. A zero is quoted against it, often ₹100 or ₹10,000.
Discount price
What you pay today, below face value. The lower the price, the higher your return.
No coupon
Nothing is paid in between. The whole return arrives in one lump at maturity.
Yield
Your yearly return, worked from the price, the face value and the time to maturity.
Take-away: A zero has one cash flow: the face value, on one date. That is what makes it a zero.
Trainer notes
Because there is only one payment, a zero's price is simply that single payment discounted back at the going rate. The longer the wait, the lower the price for the same face value.
The return, with real arithmetic
THE SET-UP
A zero-coupon bond has a face value of ₹10,000 and matures in 5 years.
It is bought today for ₹7,500.
- The only cash flow is ₹10,000, received in 5 years.
- Total gain = ₹10,000 − ₹7,500 = ₹2,500.
- Yearly return = (10,000 ÷ 7,500) raised to the power 1/5, minus 1.
- = 1.3333 raised to 0.2, minus 1 = 0.0592, i.e. about 5.92% a year.
Result: No interest is paid, yet the bond earns about 5.92% a year before tax as the price climbs to face value.
Illustration with assumed, invented figures. Not a forecast and not a real bond.
Trainer notes
Do the power calculation with the room on a phone. The point to land: a zero's return is locked in at purchase only if it is held to maturity; if sold earlier, the price depends on yields then.
Treasury bills: the government's short zero
Three tenors
Issued for 91, 182 or 364 days. All are zero-coupon: bought below ₹100, repaid at ₹100.
Who issues them
The Government of India, via RBI auctions. Repayment is a sovereign obligation; prices still move.
Who can buy
Banks, funds and firms; individuals too, via RBI Retail Direct, from ₹10,000.
Where they fit
The 1-year T-bill is an additional benchmark SEBI sets for debt schemes up to one year.
Sources: RBI auction notifications for 91/182/364-day Treasury Bills; RBI Retail Direct FAQ, 12 Nov 2021; SEBI additional-benchmark norm.
Trainer notes
All three tenors are offered in RBI's weekly auction, usually on Wednesdays; notified amounts vary by week. Retail investors bid on a non-competitive basis, limited to 5% of the notified amount. Cash Management Bills are a very short variant RBI issues as needed.
STRIPS: making zeros from a coupon bond
A regular government bond can be split into its separate cash flows.
Start with a coupon bond
A regular G-sec pays interest every six months and repays principal at the end.
Strip it
Each interest payment and the final principal becomes a separate security that can be traded on its own.
Each piece is a zero
Every strip now has one payment on one date — a zero-coupon bond in its own right.
Reconstitution
The strips can be reassembled into the original bond. This is the reverse of stripping.
Take-away: Allowed on central G-secs since 1 April 2010; extended to state government securities in June 2025.
Source: RBI, Separate Trading of Registered Interest and Principal of Securities (STRIPS); circular on state G-secs, 12 June 2025.
Trainer notes
STRIPS stands for Separate Trading of Registered Interest and Principal of Securities. It builds a zero-coupon curve across maturities and helps institutions match assets to liabilities. A five-year bond yields eleven strips: ten half-yearly coupon strips and one principal strip.
How each one is taxed
| Instrument | How the gain is taxed |
|---|---|
| Treasury bills | At the investor's slab rate. A T-bill matures in 364 days or less, so the gain is always short-term. No indexation; no TDS. |
| Listed zero-coupon bond | Where taxed as a capital gain: over 12 months, long-term at 12.5% without indexation; 12 months or less, the slab rate. |
| Unlisted bond or debenture | At the slab rate, whatever the holding period, on transfer, redemption or maturity on or after 23 July 2024. |
| Notified zero-coupon bond | Government-notified (infrastructure or PSU issuers). Capital-gains treatment; if listed and held over 12 months, 12.5%. |
Sources: Income-tax Act 2025 (formerly s.2(48), s.50AA and s.112A of the 1961 Act); Finance (No.2) Act 2024 amendment of s.50AA, effective 23 July 2024.
Trainer notes
A non-notified zero's discount may instead be taxed as interest at slab rate; sources differ, so refer clients to a tax professional. Before 23 July 2024 indexation applied to unlisted bonds (20%); it has gone.
The instruments today
Current features, not market prices. These are rules and conventions in force on 16 October 2026.
- T-BILL TENORS
- 91-364dThree maturities: 91, 182 and 364 days, all zero-coupon, all auctioned by RBI.
- MINIMUM FOR AN INDIVIDUAL
- ₹10,000Smallest amount a person can invest in T-bills and G-secs via RBI Retail Direct.
- STRIPS ALLOWED SINCE
- 2010Central G-secs strippable into zeros since 1 April 2010; state G-secs added June 2025.
Sources: RBI Retail Direct FAQ, 12 Nov 2021; RBI STRIPS framework (2010, revised 2018) and state-G-sec circular, 12 Jun 2025.
Trainer notes
These are instrument features and regulatory dates, not price data, so the latest position is used. The actual discount price or yield of a specific bill changes daily and is not shown here.
If you learnt this from older material
What older decks say
- A zero-coupon bond is just a discounted corporate bond.
- Long-term gains are taxed at 20% with indexation.
- Government paper comes in large amounts only.
- Zeros are a niche corporate product.
What holds now
- Same idea; T-bills and STRIPS are zeros too.
- Indexation is gone: 12.5% on listed; slab on unlisted since 23 Jul 2024.
- Individuals buy T-bills from ₹10,000 via RBI Retail Direct.
- Eligible G-secs can be stripped into zeros across maturities.
Take-away: The concept held. The tax rules and the ways an individual can buy changed.
Sources: Finance (No.2) Act 2024 (unlisted-bond rule, 23 Jul 2024); RBI Retail Direct (2021) and STRIPS framework.
Trainer notes
Older training predates Retail Direct (2021), the removal of indexation (23 July 2024) and the slab-rate rule for unlisted bonds. The arithmetic of a zero, though, is unchanged.
Four things people get wrong
Misconception'A zero-coupon bond pays no return.'
What is trueIt pays nothing in between, but the gap between the discount price and the face value is the return.
Misconception'A zero has no interest-rate risk.'
What is trueIts price still moves with yields before maturity, and the longer the maturity, the bigger the swing.
Misconception'T-bills and bonds are taxed the same.'
What is trueA T-bill's gain is always at the slab rate. A listed bond held over a year can be long-term at 12.5%.
Misconception'T-bills are only for big institutions.'
What is trueAn individual can buy them via RBI Retail Direct from ₹10,000, on a non-competitive basis.
Check yourself
Question 1: A zero-coupon bond is bought for ₹7,500 and repays ₹10,000 after 5 years. What is the gain, and roughly the yearly return?
Answer: Gain = ₹10,000 − ₹7,500 = ₹2,500. Yearly return ≈ 5.92%: (10,000 ÷ 7,500) raised to 1/5, minus 1. (Assumed figures; holds only if kept to maturity.)Question 2: How is the gain on a 182-day Treasury bill taxed, and why can it never be long-term?
Answer: At the investor's slab rate. A T-bill matures in 364 days or less, so it is always held 12 months or less and the gain is always short-term. No indexation and no TDS apply.Question 3: What does 'stripping' a government bond do, and what is each piece?
Answer: It separates each interest payment and the final principal into its own security that trades on its own. Each piece has one payment on one date, so it is a zero-coupon bond. Reconstitution reverses it.
Sources and disclaimer
Sources for the figures in this explainer
- Treasury bills are zero-coupon, issued at a discount in 91-, 182- and 364-day tenors by RBI auction; retail bids are non-competitive (up to 5%): RBI T-bill auction releases, Aug 2026.
- Individuals can buy T-bills and G-secs from ₹10,000 via RBI Retail Direct: RBI Retail Direct FAQ, rbi.org.in, 12 November 2021.
- STRIPS splits a G-sec into separate zero-coupon pieces (one per cash flow); on central G-secs since 1 Apr 2010, on state G-secs since 12 Jun 2025: RBI STRIPS circular, 12 Jun 2025.
- T-bill gains: slab rate (always short-term). Listed zero-coupon bonds: capital gains, long-term 12.5% (no indexation) after 12 months: Income-tax Act 2025; indexation removed 23 Jul 2024.
- Unlisted bonds/debentures: slab rate whatever the holding period (transfer, redemption or maturity) from 23 Jul 2024: Income-tax Act 2025. Notified zero-coupon bonds are Govt-specified.
- All prices, the face value and the yield in the worked example are invented for illustration and are not a real bond.
This material is for training and investor education only. It is not investment, tax or legal advice and is not a recommendation to buy, sell or hold any security or scheme. Examples use assumed figures unless a source and date are shown. Mutual fund investments are subject to market risks; read all scheme related documents carefully. Trustner Asset Services Pvt. Ltd. is an AMFI-registered Mutual Fund Distributor (ARN-286886).