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.