Indian Debt Market Investments

The Indian debt market is one of the largest in Asia and a lucrative investment for NRIs looking for assured returns. The debt securities, mostly in the form of bonds are important means to raise capital from investors, rather through the banking channels. In the Indian debt market, the debt instruments have very low risk and the returns are almost assured. The bonds traded in the debt market have a fixed return which is known as ‘Coupon Rate’ or ‘Interest Rate’.

NRI investors are eligible to invest in any instrument under the debt category provided the ‘NRI Window’ is enabled during the offer by the issuer. For all practical purposes, the rules and regulations for investing are same for NRIs and OCIs (Overseas Citizen of India). The types of bond that an NRI investor can choose are listed below:

  1. Public Sector Unit (PSU) and Capital Bonds
  2. Secure Corporate Bonds and Non-Convertible Debentures (NCDs)
  3. Government Tax-free NRI Bonds
  4. Treasury Bonds – Guaranteed Returns
  5. Municipal and Zero Coupon Bonds
  6. Infrastructure Bonds
  7. Bonds issued by National Highways Authority of India (NHAI), Rural Electrification Corporation (REC), Power Finance Corporation (PFC) etc.

The bonds are rated by credit rating agencies like CRISIL, CARE and ICRA depending on the ability of the issuer to pay back the debt on time. The higher the credit rating, lower are the chance of the issuer defaulting on the payments.

Procedure for NRI Investment in Bonds:

When the issuer offers the bonds for purchase, there will be a limited time frame for subscription. Some of the popular bonds may get oversubscribed in a few days and the issue might get closed for subscription. NRI investors, therefore have very limited time to subscribe for a bond issue. They can either subscribe to it over online brokerage platforms or issue a Power of Attorney (PoA) to a known person, who can apply in physical form, on the NRI investor’s behalf. The bonds in the Indian debt market are available for NRIs on both repatriable and non-repatriable basis.

NRI investments in bonds can be made through both NRE (Non-Resident External) and NRO (Non-Resident Ordinary) accounts.

  1. To subscribe on Repatriable basis – To be applied from a demat account linked to an NRE account, if applying online. If applying physically, the application should be through rupee denominated check/ bank draft from an NRE account.
  2. To subscribe on Non-Repatriable basis – To be applied from a demat account linked to an NRO account if applying online. If applying physically, the application should be through rupee denominated check/ bank draft from an NRO account.

Procedure for Sale/Redemption and Receiving Interests:

The bonds after allotment are listed on stock exchanges and can be sold before maturity or it can be held till maturity, on which the issuer pays the face value of the bond. However, the selling of bonds on stock exchanges can be done only if the purchase is done through a demat account.

If the NRI investor has purchased the bond online through a demat account, the sale/redemption proceeds and the interest earned will be credited to the bank account linked to the demat account. In the case of physical application, a copy of a canceled check of the bank account to which the sale proceeds are to be credited is to be attached along with the application.

If the purchase is initiated through an NRE account, the payments can be credited to either an NRE or NRO account as mentioned and are repatriable. If the purchase is initiated through an NRO account, the payments can be credited only to an NRO account, which is non-repatriable.

Taxability on Bonds for NRIs

Unless specified as ‘Tax-free’ bond, the gains made from the sale of a bond or the interest received from it are taxable under the Income Tax Act of India.  The interest amount received from the bonds held by an NRI is taxed according to the relevant tax status of the category ‘Income from Other Sources’. If the bonds are sold on the stock exchanges, either LTCG (Long Term Capital Gains) Tax or STCG (Short Term Capital Gains) Tax will be applicable depending on the duration for which the bond was held by the NRI.

Tax-free Bonds are a very popular investment option for NRI investors as they offer tax benefits and carry very low risk. Such bonds, usually issued by government enterprises have a long maturity period and pay a fixed interest rate or ‘coupon rate’. This rate is linked to the prevailing rate of government securities at the time of issue. The interest earned on these tax-free bonds is fully exempt from income tax.

However, if these bonds are sold by an NRI investor on the stock exchange, the gains made are subject to Capital Gains tax depending on the holding period. If the bonds are sold on the stock exchanges within 12 months of purchase, STCG tax is applicable which is equal to the tax rate of the investor. If it is sold after a holding period of more than 12 months, LTCG tax is applicable which is 10.3% of the gains made. For an NRI investor, the relevant tax applicable is deducted as TDS (Tax Deducted at Source) and the post-tax value is credited to the bank account specified.

The gains made from trading of all types of bonds on stock exchanges do not carry any indexation benefit. Before any investments by NRIs in Bonds, they should ask the questions below:

  1. Who is the issuer of the bond and what is the credit rating assigned to the issue?
  2. As an NRI, what benefit does subscribe to the bond offer, have over other investment alternatives?
  3. What is the taxability on the interest earned and capital gains earned, if any?
  4. Can the interest earned or the gains made be repatriated?
  5. What is the minimum tenure specified in the bond issue and is it worth investing in Bonds for that tenure?
  6. What is the purpose of investing in Bonds – is it for Capital appreciation or for Capital Protection or for steady returns?