Guidance Note – Form 2

Application for Notification of a Zero-Coupon Bond under Rule 7

Purpose of Form 2:

Form 2 is prescribed under Rule 7 of the Income-tax Rules and is used by:

⮚ Infrastructure capital companies

⮚ Infrastructure capital funds

⮚ Infrastructure debt funds

⮚ Public sector companies

to apply for notification of a Zero-Coupon Bond (ZCB) under Section 2(112) of the Income-tax Act, 2025 (earlier Section 2(48) of the ITA, 1961).

Notification of a ZCB is a mandatory pre-condition for the bond to qualify as a “zero-coupon bond” for tax purposes. Only notified ZCBs are eligible for the special tax treatment of discount under Section 32(1)(d).

Form 2 ensures that the Central Government can evaluate whether the proposed bond issuance satisfies the statutory conditions relating to:

⮚ Minimum/maximum tenure

⮚ Investment commitments

⮚ Rating requirements

⮚ Listing requirements

⮚ Reporting and compliance undertakings

Who Should File Form 2

Form 2 must be filed by an entity proposing to issue a Zero-Coupon Bond and seeking notification from the Central Government. Eligible entities include:

1. Infrastructure capital company

2. Infrastructure capital fund

3. Infrastructure debt fund

4. Public sector company (as defined under Companies Act or statute)

When to File

Under Rule 7:

⮚ Form 2 must be filed at least 3 months before the proposed date of bond issue.

⮚ Applications cannot be filed for a bond to be issued beyond two tax years following the tax year of application.

⮚ The Central Government must dispose of the application within 6 months of receipt.

How to File

As per Rule 7:

⮚ Form 2 must be furnished electronically using:

■ Digital Signature, or

■ Electronic Verification Code (EVC).

Supporting documents must be attached electronically with the form.

Filing Count (Illustrative)

The number of Form 2 filed over the past five years is 06.

Structure of Form 2

The Form is structured into Part A (Applicant Identification) and Part B (Bond and Investment Details).

Part A – Personal / Entity Information

Information includes:

⮚ Tax Year

⮚ Name of Applicant / Entity

⮚ PAN

⮚ Aadhaar (Individuals)

⮚ Address (segregated fields for system uniformity)

⮚ Contact details (phone, mobile linked to Aadhaar, email)

This mirrors the standardization changes also introduced across forms under the new regime.

Part B – Bond Details and Investment Plan

Key fields include:

1. Category of Applicant

■ Infrastructure capital company

■ Infrastructure capital fund

■ Infrastructure debt fund

■ Public sector company

2. Date of Incorporation / Registration with supporting document.

3. Additional details for Infrastructure Debt Funds:

■ Notification number under Schedule VII (Table 46)

■ Approval date under Section 10(47) (now Schedule VII reference)

4. Objects of the Applicant

■ Main and ancillary objects supported by Memorandum / Trust Deed.

5. Nature of Business (for public sector companies).

6. Bond Issuance Details

■ Total number of bonds

■ Amount for which bonds will be issued

■ Amount payable at maturity

■ Discount

■ Period of life of bond (years/months/days)

Rule 7 requires tenure 10 to 20 years.

7. Financial / Tax Year of issuance.

8. Objects of the Issue

– Purpose for raising funds through ZCB.

9. Detailed Investment Plan

Includes:

■ Name of investee entity

■ Nature (public sector / other enterprise)

■ PAN / Aadhaar (if applicable)

■ Address and project details

■ Project commencement and operation dates

■ Sources of investment (own funds, borrowings, other bonds, etc.)

■ Management team executing the project

■ Funds proposed to be invested across six tax years

These details help verify compliance with mandatory investment timelines under Rule 7:

■ Infrastructure companies/funds: 25% in T+1 year, balance within 4 years

■ Public sector companies: 15% in T+1 year, balance within 6 years

10. Project Report Availability – Must be attached if available.

11. Declaration & Undertakings

The Form requires an undertaking consistent with Rule 7:

■ ZCB proceeds will be invested within statutory timelines

■ Infrastructure debt funds will maintain a sinking fund for interest accrual invested in government securities.

Verification & Certification Requirements

Form 2 is filed by the authorized signatory of the applicant entity.

A Power of Attorney must be attached where applicable.

Additionally, after notification:

• Rule 7 requires the entity to file Form 3 annually within 2 months from end of each relevant tax year, certified by an accountant as defined in Section 515(3)(b).

Key Legal Framework [Rule 7 Overview]

Rule 7 sets out:

Conditions for Notification

Before a ZCB is notified, the Central Government must verify:

1. Tenure: 10–20 years

2. Credit Rating: Investment grade from two SEBI-registered credit rating agencies

3. Listing: Bond must be listed on a recognized stock exchange

4. Investment Undertakings

o Infrastructure companies/funds: 25% within T+1 year; balance within 4 years

o Public sector companies: 15% within T+1 year; balance within 6 years

o Infrastructure debt funds: Sinking fund requirement

5. Application Timelines

6. Submission of annual accountant certificate in Form 3

7. Power of Government to withdraw approval for non-compliance

Functional Enhancements

Form 2 incorporates modern formatting and system-readiness:

• Segregated fields for name, PAN, address, etc. (uniform system structure)
• Dropdowns and tick-boxes for entity category
• Auto-computed tax year sequences for multi-year investment projections
• Structured multi-row project and investment tables
• Attachment-enabled sections (project report, organizational structure, certificates)

Outcome and Usage

For the Applicant (Issuer)

■ Notification ensures the bond qualifies as a Zero-Coupon Bond under Section 2(112).

■ Discount becomes deductible on a pro rata basis under Section 32(1)(d).

■ Non-notified bonds are not eligible for such tax treatment.

■ Non-compliance with investment timelines or reporting obligations can lead to withdrawal of notification.

For the Central Government

■ Ensures that notified ZCBs fund genuine long-term infrastructure development.

■ Provides mechanism to track utilization of ZCB proceeds through Form 3.

Practical Guidance for Filing Form 2

1. Prepare investment plans and project documentation well ahead of the 3-month filing deadline.

2. Ensure SEBI-compliant dual credit rating is obtained before filing.

3. Confirm that the bond can be listed on a recognized stock exchange.

4. Attach all mandatory documents:

o Certificate of incorporation / registration

o Trust deed (for funds)

o Project report

o Organizational structure

o Notification copies (IDF approvals)

5. Use consistent project data across multiple tables.

6. Ensure undertakings are correctly selected (company/fund/IDF/PSC).

7. Maintain internal tracking for mandatory investments in T+1 to T+6 tax years.

8. After notification and issuance, timely file Form 3 each year.

Conclusion

■ Form 2 provides a structured, transparent, and detailed framework to assess eligibility for issuing Zero-Coupon Bonds under Rule 7.

■ Correct and timely filing is critical for ensuring recognition of ZCBs and availing tax benefits.

■ Entities must meticulously prepare supporting documentation, investment plans, and compliance undertakings to avoid delays or rejection.

Zero-coupon bond notification under Rule 7 requires strict filing, investment, rating and listing compliance before tax recognition. Form 2 is the prescribed application under Rule 7 for infrastructure capital companies, infrastructure capital funds, infrastructure debt funds and public sector companies seeking notification of a proposed zero-coupon bond. Notification is a mandatory pre-condition for the bond to qualify as a zero-coupon bond and to obtain the special tax treatment of discount. The form collects applicant, bond and investment details so the Central Government can verify tenure, credit rating, listing, investment commitments and reporting undertakings.