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.
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.
Let's explore the diverse universe of bond investments available to NRIs in India. Refer to the table for a succinct summary -
|Type of Investment in Bonds||Key Features|
|Public Sector Units and Capital Bonds||Although these bonds do not offer any tax exemption, the interest accumulated here is tax-free as per Section 10 (15) (IV) (h). NRIs can enjoy deductions by investing in Capital Gain Bonds offered by entities like REC and NHAI under Section 54 EC. These bonds come with a lock-in period of three years.|
|Non-Convertible Debentures (NCDs)||NCDs are essentially corporate bonds that cannot be converted into equity shares and are tradable on the market. They are long-term investment tools with maturity periods that span from one year up to twenty years.|
|Debt Mutual Funds||NRIs can invest in debt mutual funds that provide fixed returns. However, they must first submit their FATCA declaration. The investment is processed after deductions from either the NRE or NRO account of the investor.|
|Bharat Bond ETF & FOF||Bharat Bond ETF & FOF, issued by the Indian government, are considered secure, cost-effective, and high-yielding. They are increasingly popular among NRIs. The Bharat Bond ETF merges the advantages of ETFs with maturity benefits|
This assortment of bond investments ensures that NRIs can pick and choose based on their risk appetite, financial goals, and investment horizon.
The advantages of NRIs investing in government securities are plentiful, with each point presenting a compelling reason to consider this investment avenue:
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.
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.
Note: NRIs also have the opportunity to invest in various tax-free bonds in India which provide a viable option to circumvent tax liabilities.
Here are some key conditions to bear in mind when buying with repatriation or non-repatriation -
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.