Bond Investment for NRIs in India

The Indian market offers multiple investment avenues, mutual funds, real estate, equities, and more to NRIs. But when it comes to steady returns with minimal risk, bond investments for NRIs are a good option. In light of this, on April 1, 2020, the government of India introduced the Fully Accessible Route (FAR). It allows NRIs without any investment ceiling to invest in certain government bonds.

To help you out, this blog provides all the aspects that one needs to know about NRI bonds in India. So let's gather all the information about it. 

Key Takeaways

• NRI bonds are debt instruments in which NRIs invest their money. They are often backed by the Indian government.
• Bond options range from government securities under the FAR to secured corporate bonds and PSU. 
• They provide fixed interest payments to investors.
• Before investments, NRIs should verify the credit rating of the bonds to ensure the risk aligns with their financial goals. 
• Investments made via NRE and FCNR accounts are freely and fully repatriable, whereas NRO accounts have some restrictions.

What Are NRI Bonds?

NRI bonds refer to debt instruments in which NRIs put their money. These include public sector bonds, government securities, corporate bonds, and other fixed-income products.These investments are generally considered low to moderate risk and provide relatively stable and fixed income returns.

Under this, when you buy a bond, you pay money to the government-linked companies (PSUs). When the loan is paid off (maturity), along with your investment amount, you receive some interest income. Furthermore, compared to high-risk investments like equities, NRI bonds offer more stable but relatively moderate returns.

This was all about NRI bonds. Moving ahead, let's know whether NRIs can also invest in bonds in India.

Can NRIs Invest in Bonds in India?

Yes, NRIs are allowed to invest in Indian bonds. With the introduction of the Fully Accessible Route (FAR) on April 1, 2020, the Indian government permitted NRIs to purchase certain government bonds. This helps NRIs to buy government bonds as per their desire.

However, not all bonds are available for NRIs for investment in India. Considering this, let's know in the next sections what bonds are available for NRI investments in India. 

Different Types of Bonds NRIs Can Invest in India

Here is the list of different types of bonds NRIs can invest in India:

RBI Bonds (Government of India Bonds)

These bonds are issued by the Reserve Bank of India. These are savings bonds backed by the government of India. The RBI bonds offer investors a stable and steady source of income.

• Sovereign backing makes these bonds very safe.
• The interest rate of these bonds is as per the government rate. Additionally, due to various sectors, it can fluctuate.
• Various channels are available for NRIs to purchase these bonds, but first, they must meet the specific requirements.
• The tenure period of these depends on the bond issue in question. 

Treasury Bills or T-Bills

The Indian government issues treasury bills for borrowing money for a limited period. It is a safe option for NRIs to keep their additional money safe for a short time. Also, treasury bills are on sale for less than their original price.

• These are safe investment options and can be quickly turned into cash.
• You can get the T-bills for 91, 182, or 364 days.
• These are available through a broker or RBI Retail Direct.
• The returns you get from it are the difference between the amount you paid and its face value. 

Public Sector Undertaking (PSU) Bonds

Government-owned companies such as REC, NHAI, IRFC, and PFC issue PSU Bonds. These bonds receive funding for large infrastructure and public sector projects. PSU bonds are relatively safe when highly rated and generally offer moderate returns depending on market conditions

• Generally, most of the PSU bonds last between 5 and 15 years.
• Interest rate in these bonds generally ranges from 7% to 9%, depending on the credit score. 
• These bonds are available at NRI-enabled bond platforms or brokers.

Zero-Coupon Bonds

These bonds are sold for less than their face value, and you get paid at face value. Considering this, Zero-Coupon bonds do not pay regular interest. However, when they mature, they do offer a lump sum amount. This investment option is ideal for NRI investors who aim to earn long-term returns.

• The length of these bonds varies depending on the issue.
• Helps in organising your future finances, as you know the returns.
• These bonds are available at the bond platform and brokers that sell NRI-eligible bonds.
• Investment return is the difference between the maturity value and the issue price.

Corporate & Infrastructure Bonds (Chosen NRI-Eligible Ones)

These bonds are issued by infrastructure and private companies. To invest in these bonds, NRIs need to follow specific rules. These funds help in the growth of business and infrastructure development.

• Corporate & Infrastructure bonds offer higher returns compared to government-backed bonds.
• Investment return rate generally falls between 7% and 10%. Although it depends on how much risk you take.
• The tenure period usually ranges between 5 and 15 years.
• Investments are available through brokers and bond platforms.

Bharat Bond and Bond ETFs (Indirect Exposure to Bonds)

With bond Exchange-Traded Funds (ETFs), with a single investment, you get access to a group of bonds. It is because these ETFs invest in bonds issued by the public sector and government entities.

• Bond ETFs are easy to buy, sell, and spread out.
• The investment returns on these bonds depend on the portfolio,
• The duration of these bonds is determined by the ETF structure.
• These bonds are available using a demat account on the stock markets. 

Dated Government Bonds (G-Secs) and Government Securities

The Indian government, to finance its infrastructure and other needs, issues marketable, long-term bonds known as Government Securities. These are one of the safest investment options available in India. 

• The returns on these investments are easy to forecast.
• The standard length of these investments is 5, 10, 15, 30, and sometimes even 40 years.
• Depending on the market states, returns generally range between 6.5% and 7.5%.
• These bonds are available at the RBI Retail Direct platform or in the secondary market.

State Development Loans (SDLs)

These are bonds that are issued by the state government to fund infrastructure and development initiatives at the state level. They generally pay a little more return than central government bonds.

• Compared to G-Secs, these have slightly higher risk but offer better investment returns
• SDLs generally pay 0.25% to 0.50% more interest than G-Secs.
• Usually given out for 3 to 10 years.
• NRIs can purchase SDLs from either RBI Retail Direct or the secondary market.

Capital Gain Bonds (Section 54EC)

Certain government agencies issue Section 54EC Capital Gain Bonds. These are tax-saving bonds that let investors save their money on taxes when they sell property for a long time.

• These bonds let you avoid paying long-term capital gains tax.
• These bonds come with a five-year lock-in period.
• Once you sell property in India, they lawfully help you pay less tax.
• Generally, the interest rate in these bonds ranges between 5% and 6%. 
• NRIs can invest in these bonds, i.e., which is six months after the sale of the asset.

Tax-Free Bonds (Municipal and Some PSU Tax Bonds)

Under the tax-free bonds, you are not liable to pay tax on the earned interest. These are not issued anymore. Considering this, investors still trade in older bonds. These bonds push for long-term funding for infrastructure. 

• These bonds provide you with tax-free income.
• The interest rate in these bonds generally ranges between 5% to 6%.
• The lock-in period of a tax-free bond is 10 to 15 years.
• NRIs can buy the tax-free bonds from brokers available at the secondary market.

Sovereign Gold Bonds (SGBs)

These were government bonds connected to gold. These were issued to lower the physical demand for gold. 

• Earlier, these bonds were issued at fixed maturities.
• Returns on these bonds depended on the interest rate and gold price.
• If NRIs are allowed, they can trade or hold the existing bonds.

Debentures/Non-Convertible Debentures (NCDs)

These bonds are issued by companies as long-term loan instruments that do not turn into shares. The NCD bonds help businesses to get money for a long time.

• If you are willing to take more risk, they provide you with more money.
• Generally, the lock-in period of these bonds is 5 to 10 years or more. 
• Interest rates usually range between 8% to 12%.
• NRIs can invest in these bonds through platforms and brokers approved for NRIs.

These are the different types of bonds for NRIs in India. These offer varied levels of returns, risks, and time lengths. Additionally, from time to time, the bond rules can be modified by the RBI, which may affect eligibility. Apart from this, NRIs, according to their investment choices, can opt for 5-year, 10-year, and long-term bonds. 

Now, moving further, let's know the benefits of NRI bonds. 

Benefits of NRI Bonds

The key benefits for NRIs to invest in Indian bonds include:

• Predictable Income: Bonds have a fixed interest rate. So you can easily predict every year how much you will earn.
• Different Time Options: While investing in bonds, you can select between long-term options (10-year or 30-year G-Secs) and short-term options (T-Bills).
• Low Risk: Compared to stocks, government and AAA-rated PSU bonds are usually considered safer investment options.
• Diversification: If you already have property or stocks by your side, bond balances your investment portfolio.

These are some of the benefits of Indian bonds for NRIs. Further, Compared to equity investments, bonds are generally considered safer, though risk levels vary across different debt instruments. Now, moving forward, let's look at the credit ratings of NRI bonds in India. 

Credit Ratings of NRI Bonds

Credit ratings showcase the possibility that a debenture or bond will offer on its principal and interest payments. The higher the rating, the safer the investment. Considering this, before investing in Indian bonds, NRIs should first verify their ratings from reputable agencies like CARE, CRISIL, or ICRA. To help you out, the table below provides you with an idea of how to check credit ratings.

Further, for safer investment returns, purchase AAA and AA-rated bonds. It is especially beneficial when you want to rely on steady interest income or send money home.

Moving ahead, let's know how NRIs can invest in bonds in India. 

How to Invest in NRI Bonds?

Here is how NRIs can invest their money in securities or bonds in India:

• Step 1: Open an NRE account or NRO account and a trading/ demat account.
• Step 2: Use the RBI Retail Direct portal to purchase T-Bills, G-Secs, and some SDLs.
• Step 3: Use Dezerv, GoldenPi platforms, or connect with your broker to buy corporate, PSU, and other NRI-eligible bonds. 
• Step 4: Complete the NRI KYC, overseas address, PAN, and FATCA declaration.
• Step 5: After purchasing and completing the KYC verification, monitor coupon dates, tax treatment, and maturity. 

This is how NRIs can invest in bonds in India. Moving further, let's know how interest from these bonds is taxed in India. 

How is Interest from NRI Bonds Taxed in India?

For NRIs, purchasing bonds in India, the tax rules on interest rated depends on three things. These are:

• Bond type
• Money made (capital gains or interest)
• Account type (NRE or NRO account)

Considering this, the table below showcases tax rates on capital gains and interest rates.

This is how interest from NRI bonds is taxed in India. Moving forward, let's know what the capital gains tax on NRI bonds is. 

Capital Gains Tax on NRI Bonds

If you sell or redeem the bond before maturity, any profit you receive from that is considered capital gains. The capital gain taxation depends mainly on how long you hold the bond. 

• Short-Term Capital Gains (STCG)
• Bonds held for less than 24 months are treated as short-term capital gains.
• STCG is taxed as per your income slab rates.
• Under section 195 of the Income Tax Act, 1961, during payment, 20% + surcharge + cess TDS is generally deducted.
• Long-Term Capital Gains (LTCG)
• Bonds held for more than 24 months are considered long-term capital gains.
• It does not provide indexation benefits
• This taxation rule from tax year 2026-27 is now equally applicable to residents, NRIs, and FPIs.
• Important Points to Note for NRIs on Taxation
• Bonds do not attract Securities Transaction Tax (STT). 
• Additionally, as there is no STT, the INR 1,00,000 tax-free LTCG tax exemption does not apply.
• TDS may still be deducted. Also, you can claim excess tax by filing an ITR. 

This was all about the capital gains tax on NRI bonds. Moving ahead, now let's know how 54EC bonds help in saving capital gains tax. 

Saving Capital Gains Tax Using 54EC Bonds

Investing in 54EC bonds helps NRIs save long-term capital gains from property sales. However, for this, they need to meet the following conditions:

• Investment limit should be up to INR 50,00,000. 
• The investment should be made within six months of selling the property.
• Eligible issuers include REC and NHAI.
• Additionally, the lock-in period should be five years. 

If the above-mentioned conditions are fulfilled, the entire capital gains become tax-free for NRIs. Now, moving further, let's know the repatriation rules for NRI bonds. 

Repatriation Rules for NRI Bond Investments

The repatriation rules depend on the NRI account you used for NRI bond investments in India. Considering this:

Additionally, if you are repatriating funds more than INR 5,00,000 using an NRO account, you need to fill out Form 15CA and 15CB.

Moving forward, let's know the compliance and filing for investments in NRI bonds. 

Compliance and Filing for Investments in NRI Bonds

Once invested in Indian bonds and securities, NRIs should fulfill these compliances:

• File ITR-2 or ITR-3 forms.
• The due date for filing ITR in India is generally July 31. 
• On bond investment, no wealth tax is imposed. 

These are compliance and filing requirements that NRIs need to consider when investing in bonds in India. 

Final Thoughts

Lastly, for NRIs looking for a long-term, more reliable investment option in India, bonds provide steady income, flexibility, and safety. Additionally, with the introduction of FAR, bond investment for NRIs in India has become more accessible. Also, in the Indian debt market, it has increased the transparency. 

Further, if you need help in choosing the right NRI bond for investment, connect with Savetaxs. We provide personalized services that match your financial goals and risk appetite. So, contact us today and begin your investment journey in India.