Understanding taxation of zero coupon bonds is crucial for investors seeking tax-efficient investments. Zero Coupon Bonds, debt securities that pay no regular interest, accumulate interest that is only paid at maturity. To calculate the tax on these bonds, investors must consider the difference between the purchase price and the maturity value.
The taxation of zero coupon bonds holds significance due to their unique characteristics. They offer tax-deferred growth potential, allowing investors to defer paying taxes on interest income until the bond matures. Additionally, zero coupon bonds provide an inflation hedge as they typically have longer maturities than traditional coupon bonds.