The ABCs of NRI Bonds

Non-Resident Indians (NRIs) have a plethora of opportunities to grow their wealth by investing in their homeland, with choices ranging from real estate to direct equities and mutual funds. Yet, one investment vehicle stands out for its inherent safety and promising returns – bonds.

The Indian government's announcement in April 2020, eliminating the ceiling limit on NRI investments in certain government bonds, marked a significant turn in India's economic landscape. This opened up a new avenue for NRIs to channel their surplus funds and partake in the nation's growth story.

In this comprehensive article, we will shed light on the concept of bond investment in India and guide NRIs on how to navigate their way to fruitful investments in bonds.

What is Investing in Bonds?

Investing in bonds for Non-Resident Indians (NRIs) involves the purchase of debt securities issued by various entities such as the Indian government, municipal bodies, or corporations. When an NRI invests in a bond, they effectively loan their money to the issuer for a defined period. In return, they receive interest payments at fixed intervals and the return of the principal amount at the bond's maturity. This makes bonds a relatively secure and income-generating investment avenue.

The rules and regulations for investment in bonds by NRIs and Overseas Citizens of India (OCIs) are essentially the same. These regulations are governed by the Foreign Exchange Management Act (FEMA) and overseen by the Reserve Bank of India (RBI). As per the updated policies, there is no upper limit on the amount NRIs or OCIs can invest in certain government bonds.

Types of Investment in Bonds

Let's explore the diverse universe of bond investments available to NRIs in India. Refer to the table for a succinct summary -

This assortment of bond investments ensures that NRIs can pick and choose based on their risk appetite, financial goals, and investment horizon.

Benefits of Investment in Bonds by NRIs

The advantages of NRIs investing in government securities are plentiful, with each point presenting a compelling reason to consider this investment avenue:

• Enhanced Portfolio Diversification - Investing in government bonds helps NRIs broaden their investment portfolio and effectively mitigate their overall risk. Such diversification offers stability and balance as well as a buffer against the volatility of equity investments.
• Emergency Liquidity Provision - Government securities can be sold on the secondary market in times of sudden liquidity needs, making them a flexible asset. They can also serve as collateral for borrowing funds, further bolstering their convenience and versatility.
• Flexibility in Tenure - The varying tenures of government securities, spanning from as short as 91 days (3 months) to as long as 41 years, offer high flexibility. This makes them suitable for a wide array of investment goals and strategies.
• Safety and Risk Mitigation - Given their backing by the government, these securities are perceived as virtually risk-free, offering a secure investment path. The reliability of returns, coupled with the assurance of capital protection, make them an appealing choice.
• Ease of Repatriation - One of the significant advantages that NRIs seek in their investments is the ability to repatriate their earnings. With bond investments, all returns — both the principal and the interest — can be repatriated.

Investing in Government Bonds

The Reserve Bank of India (RBI) has opened doors for Non-Resident Indians (NRIs) to invest in Government of India bonds, also known as G-secs. These bonds are typically long-term investment instruments with a tenure spanning from 5 to 40 years. Based on this tenure, these bonds yield returns varying between 6.18% and 7.72%.

G-secs offer a set return, known as the 'coupon rate' or 'interest rate', derived from bond trading. This interest rate can either be fixed, offering a steady and predictable income stream, or floating, adjusting to current market conditions. However, it's important to note that NRIs are currently not permitted to invest in Floating Rate Bonds 2020.

Tax on Capital Gains on Investment by NRIs

It's vital to consider the implications of capital gains tax on shares for Non-Resident Indians (NRIs). Given that NRIs can invest in government securities, debentures, and listed non-convertible debentures, the applicable tax rate depends on the nature of the investment and its holding period.

• Long-Term Capital Gain Tax on Equity Shares - Equity shares or equity-oriented mutual funds held for more than 12 months qualify for long-term capital gains tax. When these securities are sold, the gain on sale is subject to a 10% tax if the profit exceeds Rs 1 lakh. However, if the gain is less than Rs 1 lakh and the Securities Transaction Tax (STT) has been paid at the time of acquisition and sale of the equity shares, the gain is exempt from tax. STT is also mandatory for the sale of units of equity-oriented mutual funds.
• Short-Term Capital Gain Tax on Equity Shares - Short-term capital gain applies to the sale of equity shares or equity-oriented mutual funds held for less than 12 months. If STT is paid, the short-term capital gain is taxed at 15%.

Note: NRIs also have the opportunity to invest in various tax-free bonds in India which provide a viable option to circumvent tax liabilities.

Conditions for Buying Repatriation or Non-Repatriation

Here are some key conditions to bear in mind when buying with repatriation or non-repatriation - 

1. Non-Resident Indians (NRIs) and Overseas Corporate Bodies (OCBs) are allowed to invest in shares/debentures, provided that the purchases are carried out via a Stock Exchange and a branch designated and authorised by the Reserve Bank of India (RBI).
2. The general permission granted by the RBI to invest on a non-repatriation basis has a validity of 5 years. After this period, authorised dealers themselves can renew the permission for a further five years.
3. The investment made by NRI/OCBs in equity or preference shares and convertible debentures of any listed Indian company should not exceed 5% of its total paid-up equity or preference capital. Similarly, it should not surpass 5% of the total paid-up value of each series of convertible debentures issued by the company. Under this scheme, NRIs/OCBs must take or give delivery of the shares or convertible debentures bought and sold.

To Conclude

The myriad opportunities for bond investment in India present Non-Resident Indians (NRIs) with a range of options to grow their wealth and diversify their portfolios. From Public Sector Units and Capital Bonds, Non-Convertible Debentures (NCDs), and Debt Mutual Funds to Bharat Bond ETF & FOF, there's something for every NRI investor based on their risk appetite and financial goals. The Reserve Bank of India's approval for NRIs to invest in government securities—considered relatively safe and risk-free—further extends the available options.

However, before investing, it's crucial to understand the tax implications, whether it's the long-term or short-term capital gain tax on equity shares. Additionally, understanding the conditions for buying with repatriation or non-repatriation rights is essential. As always, thorough research and seeking advice from a financial advisor will help ensure that your bond investment aligns well with your financial plans and expectations.