Budget ends nearly two-decade tax break for zero-coupon bond investors

The tax exemption for individual investors on income from zero-coupon bonds has been scrapped, after the government removed the benefit in the proposed budget for FY2026–27.

A zero-coupon bond is a debt instrument that does not pay periodic interest. Instead, it is issued at a deep discount to its face value, generating a return when the investor receives the full-face value at maturity.

With the removal of the tax benefit, individual investors who earn income from zero-coupon bonds must now include such earnings when calculating their taxable income and pay taxes accordingly, capital market analysts and investors say.

They said the tax exemption had gradually drawn individual investors toward zero-coupon bonds, and its withdrawal may discourage further investment in such instruments.

The government had earlier introduced the tax break to encourage individual participation in the zero-coupon bond market and support the broader development of the bond market. The rebate had been in place for nearly two decades.

The tax exemption on income from zero-coupon bonds was introduced for eligible investors through the Finance Act for FY2007–08, effective from 1 July 2007.

Under the sixth schedule of the Income Tax Act, subject to prescribed conditions, any income arising from a zero-coupon bond received by an individual, other than a bank, insurance company or financial institution, was excluded from the calculation of taxable income.

The conditions required that the zero-coupon bond be issued by a bank, insurance company or financial institution with the prior approval of Bangladesh Bank or the Bangladesh Securities and Exchange Commission (BSEC), or by any other institution with similar prior approval from either regulator.

For the purposes of this provision, the term "zero-coupon bond" also included zero-coupon Islamic investment certificates.

In the Finance Bill for FY2026–27, clause 25 of Part 1 of the sixth schedule, which provided the exemption, has been removed.

The issuance of various bond types including perpetual, subordinated, zero-coupon and coupon-bearing bonds has been on the rise following approvals from the capital market regulator, BSEC.

According to BSEC's annual report, 11 companies raised Tk6,675 crore through zero-coupon bond issuances in FY2023–24. However, only one company raised Tk171 crore through such instruments in FY2024–25.

In March this year, BSEC approved City Sugar Industries to raise Tk1,300 crore and Akij Food and Beverage to raise Tk500 crore through zero-coupon bond issuances.