Rule 23: Zero-coupon bond discount allocation
Rule 23 allocates the discount on a zero-coupon bond across tax years for section 32(d). It converts the life of the bond into calendar months and apportions the discount using the prescribed part-month convention.
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Bare law
Rule 23 - Computation of pro rata amount of discount on a zero coupon bond for purpose of section 32(d)
(1) For the purposes of section 32(d), the pro rata amount of discount on a zero coupon bond shall be computed in the following manner:— (a) the period of life of the bond shall be converted into number of calendar months and, for this purpose, where the calendar month in which the bond is issued or the bond matures or is redeemed, contains a part of a calendar month then, — (i) if such part is fifteen days or more than fifteen days, it shall be increased to one calendar month; and (ii) if such part is less than fifteen days, it shall be ignored; (b) the amount of discount shall be divided by the number of calendar months determined in accordance with clause (a); and (c) where one or more than one calendar month out of calendar months determined in accordance with clause (a) is or are included in a tax year, the amount determined in accordance with clause (b) shall be multiplied by the number of calendar months so included and the amount so arrived at shall be taken to be the pro rata amount of discount for that tax year.
Introduction
Separate the bond-life calculation from the amount allocated to each tax year. A rounded calendar-month method is prescribed, so a daily accrual spreadsheet should not silently replace it.
Rule breakdown
Collect the bond inputs
Identify the bond issue date, maturity or redemption date, period of life and discount amount for the section 32(d) computation.
Use the documented terms and the relevant statutory definitions. This rule is the discount allocation method; it does not itself settle a holder’s separate tax treatment.
Convert the life into calendar months
Convert the period of life into calendar months. For a part of a calendar month in which the bond is issued, matures or is redeemed, count one month if that part is 15 days or more and ignore it if it is less than 15 days.
The threshold includes exactly 15 days. Keep the treatment of the opening and closing partial months visible rather than rounding the entire life as a single number.
Calculate the monthly discount amount
Divide the total discount by the calendar months determined under clause (a). This gives the amount to use for each counted month.
The denominator is the prescribed bond-life month count. It is not automatically 12 and should not be replaced by the number of months in only the current tax year.
Allocate to the tax year
Multiply the monthly amount by the number of the counted calendar months included in the tax year. That product is the pro rata discount for that tax year.
Hypothetical: a discount of ₹12 lakh is allocated over a correctly determined 120 calendar months. The amount per counted month is ₹10,000. A tax year containing 12 of those months receives ₹1.2 lakh; one containing 3 receives ₹30,000.
Reconcile the complete schedule
Prepare the full term schedule and verify that the allocated month counts reconcile to the denominator. Retain the issue and maturity documents and the partial-month decisions.
If a redemption event changes the facts, review the relevant bond terms and Act treatment before updating the schedule. Do not invent a new rounding rule from an accounting convention.
Key takeaways
15-day boundary
An opening or closing part-month of at least 15 days counts as one month.
Monthly allocation
Total discount divided by counted life months gives the monthly amount.
Tax-year share
Multiply by counted months included in the relevant tax year.
Practical checklist
- Record the relevant bond dates and discount.
- Document both partial-month decisions.
- Reconcile all tax-year month allocations to the full denominator.
Avoid
- Do not use a daily method as if it were the prescribed rule.
- Do not ignore exactly 15 days.
FAQs
Does exactly 15 days count as a month?
Yes. Clause (a)(i) includes a part of 15 days or more; a shorter part is ignored.
Is discount divided by 12 in every case?
No. Divide by the total calendar months in the life of the bond determined under clause (a).
Does this rule prescribe a daily allocation?
No. It prescribes a calendar-month calculation with its stated partial-month convention.
Glossary
- Pro rata discount
- The discount amount allocated to a tax year using the counted calendar months.
- Counted month
- A calendar month included under the rule’s bond-life and partial-month calculation.