(INDIA) — The Central Board of Direct Taxes released draft Income-tax Rules, 2026 for consultation on or around February 8, 2026, including Draft Income Tax Rule 23 on how to compute the pro rata amount of discount on a zero coupon bond under section 32(d) of the Income-tax Act, 2025.
The draft rules take effect from April 1, 2026 and replace the Income-tax Rules, 1962, setting out the method for allocating a zero coupon bond’s discount over time for tax purposes.
Draft Income Tax Rule 23 targets a narrow but technical issue: how much of a bond discount can be treated as deductible when the bond is classified as a depreciable asset and section 32(d) applies.
The draft sits within the Income-tax Act’s broader depreciation framework. Section 32 governs deductions for depreciation on tangible assets such as buildings, machinery, plant and furniture, and on intangible assets such as know-how, patents and copyrights acquired after April 1, 1998, when used in business or profession.
Clause (d) under section 32(1) addresses cases where the full actual cost is already deducted under other provisions, limiting further depreciation. In that setting, Rule 23 specifies how to compute the time-apportioned portion of the discount on a zero coupon bond for the purpose of section 32(d).
Zero coupon bonds, under the draft’s approach, can fall within this depreciation logic when treated as depreciable assets. The practical effect of Rule 23 is to prevent a full upfront deduction of the bond discount by spreading that discount across the holding period.
Draft Rule 23 sets out a pro rata method based on days held. The draft’s structure calculates the deductible discount as the number of days the bond is held divided by the total tenure in days, multiplied by the total discount on the bond.
In formula form, the draft structure is expressed as: pro rata discount equals (Number of days held / Total tenure in days) × Total discount on bond. The method hinges on a daily pro rata apportionment, aligning the deduction with the use period.
The total discount, as described in the draft structure, is the face value at maturity minus the issue or redemption price. That discount is then allocated over the bond’s full tenure, with the taxpayer’s deduction reflecting only the fraction corresponding to the time the bond is held.
By using a time basis, Rule 23 ties the allowance for bond discount to the depreciation principle embedded in section 32(d). The draft description frames this as consistent with depreciation principles for financial assets treated as “plant” or intangibles.
An illustrative example included alongside the method shows how the computation works in practice. The example uses a face value of Rs. 10,00,000 and an issue price of Rs. 6,00,000, producing a total discount of Rs. 4,00,000.
The example assumes a tenure of 1,000 days and a holding period of 500 days. Applying the pro rata method yields a deductible amount of (500/1,000) × Rs. 4,00,000 = Rs. 2,00,000.
Draft Rule 23’s focus on daily pro rata allocation means the computation rests on counting days held against total tenure. Within the draft’s structure, that day-count approach is what drives the apportionment of the discount for section 32(d).
The rule is part of a wider draft rewrite of the rules framework. The draft rules aim to replace the Income-tax Rules, 1962 and align with the Income-tax Act, 2025 framework from April 1, 2026.
CBDT framed the draft as a compliance simplification measure that consolidates rules and forms. The draft description points to consolidation into 333 rules and 190 forms, down from 500+ rules and 350+ forms in the 1962 rules.
The draft also links Rule 23 to the broader architecture of section 32, including provisions for intangible assets. The draft description cross-references section 32(1)(ii) for intangibles as part of the context in which depreciation concepts apply.
The draft description also points to additional depreciation under section 32(1)(iia). That provision allows additional depreciation under 32(1)(iia) at 20% for new plant and machinery acquired after March 31, 2005, with restrictions on used assets, ships and aircraft.
Although Rule 23 addresses zero coupon bonds, its placement alongside these cross-references signals CBDT’s intent to integrate the treatment of bond discounts with the overall depreciation framework. The draft description explicitly ties Rule 23’s approach to integrating with depreciation on intangibles.
For taxpayers and practitioners, Draft Income Tax Rule 23 is a computation rule rather than a broad policy statement. Its immediate function is to specify a method for calculating the pro rata amount of discount on a zero coupon bond for the purpose of section 32(d).
The draft description indicates CBDT invited comments until a specified deadline after the February 8, 2026 release, and anticipates final rules before April 1, 2026. The final text will determine the precise wording and any related Form references as the rules move from draft to implementation.
CBDT directed readers seeking the complete draft text, including Form references and the precise wording of Rule 23, to the CBDT navigator PDF or official releases. That draft text will govern how the day-count formula and the definition of total discount apply in full detail.
The compliance timeline centers on the tax year starting April 1, 2026 under the Income-tax Act, 2025. Taxpayers holding zero coupon bonds, under the draft description, should verify the final rules after consultation for compliance from FY 2026-27.
Draft Income Tax Rule 23’s mechanics are straightforward in concept but can matter in calculation, because the deductible amount depends on the total tenure in days and the number of days held. Under the draft structure, the larger the fraction of days held, the larger the allowable pro rata discount, capped by the total discount.
By defining total discount as the face value at maturity minus the issue or redemption price, the draft pins the calculation to two values and a day-based fraction. The illustrative numbers—Rs. 10,00,000, Rs. 6,00,000, Rs. 4,00,000, 1,000 days, 500 days, and Rs. 2,00,000—show how the arithmetic operates under the draft framework.
The draft’s daily pro rata approach also reflects the underlying policy logic described in the draft: allocating the bond discount over time rather than allowing a full upfront deduction. Within the section 32(d) setting, the draft presents the method as aligned with depreciation principles.
As the consultation period runs toward finalisation ahead of April 1, 2026, the draft’s treatment of zero coupon bond discounts will be one of the many technical points in a broader rewrite that aims to replace the 1962 rules and consolidate the system into 333 rules and 190 forms.
Draft Income Tax Rule 23 Calculates Pro Rata Discount on Zero Coupon Bonds Under Section 32(d)
India’s CBDT has drafted Rule 23 for the 2026 tax framework, establishing a time-based formula for zero coupon bond discount deductions. Under Section 32(d), taxpayers must calculate deductible amounts by dividing days held by total tenure. This change, effective April 2026, integrates financial bond discounts into the broader depreciation framework, ensuring deductions reflect actual holding periods while simplifying the overall tax rule structure.
