Corporate Bond Funds: A Complete Guide for NRI Investors

For NRIs seeking stable returns and with minimal risks, corporate bond funds have become a popular investment choice in India. These investment options are considered one of the safest ways to generate fixed income. Additionally, these offer steady interest, further creating reliable passive income.

Want to know more about corporate bond funds and why NRIs should invest in them? Read the blog and explore everything about the topic, from what it is to how to invest in it.

What Are Corporate Bond Funds?

According to SEBI guidelines, corporate bond funds are a type of debt mutual fund that invests a minimum 80% of its money in bonds issued by companies. Considering this, companies issue these to raise the capital they require to function, expand, or acquire other businesses. Investing in these funds allows NRIs to lend their money in different countries. Additionally, their investment portfolio is managed by professionals.

Further, corporate bond funds are different from government bonds. It is because, instead of the government, they are backed by companies. The bonds are picked by fund managers as per their credit quality, maturity, and yield. This offers a balanced portfolio that manages both return and risk.

There are several types of corporate bond funds available for investment for NRIs:

• High-Yield Corporate Bond Funds: These target bonds with higher interest rates but lower credit ratings.
• Investment-Grade Funds: Concentrate on bonds with higher credit ratings such as AAA, AA, A, BBB, and more.
• Intermediate and Long-Term Funds: Kept bonds with longer maturity periods.
• Short-Term Funds: Bonds are invested with a generally under 3-year maturity period.

In corporate bond funds, returns are generated from two sources. First, interest payments received by the bond issuers, and second, profit received after selling the bonds. The portfolio is handled actively by the fund managers. Additionally, based on the market conditions and interest rate predictions, bonds are sold.

Moreover, for NRIs, investing in these funds is a great way to explore the Indian bonds without purchasing individual corporate bonds. It provides professional management, instant diversification, and better liquidity than individual bonds.

This was all about corporate bond funds. Moving ahead, let's know why NRIs should invest in these.

Why NRIs Prefer Corporate Bond Funds?

The table below compares corporate bond funds with other investments. The information mentioned in this is as per October 2025 data.

Returns are indicative, based on historical data, and not guaranteed.

Further, the choice of corporate fund bonds becomes clearer when you consider:

• Liquidity Benefit: Unlike fixed deposits, where you lose interest on premature withdrawals, you can redeem corporate bond funds anytime. Considering this, in 2-3 business days, you receive your money.
• Yield Optimization: For trading in the secondary market at attractive prices, fund managers look actively for higher-yielding bonds. It is something that an individual investor cannot access easily.
• Professional Credit Selection: The credit health of the companies is constantly managed by the fund managers. Considering this, if the rating of a company drops from AA to A, the manager, without an increase in default risk, sells those bonds.
• Diversification by Default: With corporate funds, you can invest in 50+ different companies. So, even if one company defaults, your loss will be minimal.

So, these are the key reasons why NRIs should invest in corporate bond funds. Moving further, let's know the taxation on corporate bonds for NRIs.

Taxation of Corporate Bond Funds for NRIs

In India, when talking about taxation of corporate bond funds for NRIs, things get technical, but vital for your returns. Therefore, you need to pay close attention to this. According to IND money, from April 1, 2023, there are significant changes made in the taxation of mutual fund investments in India.

Considering this, for all the investments made on or after this date, all debt mutual funds, including corporate bond funds, will now be taxed regardless of the holding period as per short-term capital gain at the income tax slab rate of the investor. Further, for such investments, the earlier benefits of 20% long-term capital gain (LTCG) with indexation after three years are no longer available.

Additionally, as of now, whether you hold the corporate bond funds for six months or six years, the capital gain will be added to your income and will be taxed as per your slab rate.

Apart from this, surcharge and cess are on top of these rates. Now, let's know the TDS on corporate bond funds for NRIs.

Tax Deducted at Source (TDS) on Corporate Bond Fund

When you redeem your investment, before crediting money into your account, TDS is deducted by AMC. For NRIs, the rate of TDS is 30% on capital gains (the highest slab rate) on debt mutual funds.

Considering this, if your actual tax liability is less, you can claim a refund by filing an ITR in India. Additionally, if your capital gains from debt funds are up to INR 2,50,000 per year and you do not have any other source of income in India. In this scenario, you can claim a complete TDS refund when filing your ITR.

Further, NRIs are also liable to pay tax on their corporate bond fund income in their current resident country. However, many countries have tax treaties signed with India, i.e., DTAA (Double Taxation Avoidance Agreement). It helps in preventing double taxation on the same income. Considering this, to claim the DTAA benefits, NRIs should have a Tax Residency Certificate (TRC) from their resident country. Additionally, should also apply for Form 10F on the income tax portal online.

This was all about corporate bond fund tax rules for NRI investors. Moving ahead, let's see how NRIs can invest in these bonds.

How NRIs Can Invest in Corporate Bond Funds?

NRIs can invest in corporate bond funds in India in several ways. It includes:

• NRI Bond Accounts: Through Non-Resident External (NRE) or Non-Resident Ordinary (NRO) Accounts, NRIs can invest in corporate bonds.
  • NRE Accounts: In these accounts, funds are fully repatriable (principal + capital gain). It means that you can transfer these funds to your resident country without any restrictions on the amount. Additionally, Interest earned on NRE accounts is tax-free; investment gains remain taxable.
  • NRO Accounts: These accounts are used to managed you income earned in India. Additionally, funds in these accounts are partially repatriable. However, unlike NRE accounts, interest earned on NRO accounts is taxable in India.
• Bond Funds or ETFs: Exchange-traded funds (ETFs) or bond mutual funds are also a good way to invest in a diversified portfolio of bonds. You can purchase them through a broker or via an online platform.
• Direct Investment in Bonds: Through the National Stock Exchange (NSE) or Bombay Stock Exchange (BSE), NRIs can purchase bonds directly in the Indian market. For this, you need to:
  • Open a demat account to electronically hold the bonds.
  • Additionally, you should have a trading account with a broker who provides bond investment facilities to NRIs.
• Participating in Bond Issuances: NRIs, either through private placements or public issue can also take part in new issuances of bonds in the primary market.

So this is how NRIs can invest in corporate bond funds in India. Moving further, let's know the key risks NRIs should consider while investing in corporate bond funds.

Key Risks to Consider while Investing in Corporate Bond Funds

Generally, corporate bond funds are considered safer than equities for investment for NRIs. However, they still contain certain risks. These are as follows:

• Credit Risk: It is a default risk from bond issuers. Compared to government bonds, corporate bond funds have higher credit risk.
• Interest Rate Risk: The interest rate and bond prices have inverese relationship with each other. Considering this, if the interest rate of bonds rises, the market value of them may decrease.
• Currency Risk: For NRIs, investing in foreign bonds can be impacted by currency fluctuations. For instance, if the value of the Indian ruppe agains the U.S. dollar depreciates, returns from USD-denominated affect bonds.
• Liquidity Risk: Some bonds, like goverment are highly liquid. However, others, like certain corporate or municipal bonds, have lower liquidity. It further creates difficulty in selling them at a good price.

These are some of the key risks associated with corporate bond funds that NRIs should consider before investing in them.

Final Thoughts

Lastly, corporate bond funds are a good investment option for NRIs in the financial landscape of India. They provide a stable income with portfolio diversification and lower risk. However, it is also important to consider the risk involved in these investments, such as credit risk, interest rate, and currency fluctuations.

Further, before investing in bonds, NRIs should consider the bond type, tax implications in both countries, i.e., India and the resident country. Also, you can connect with Savetaxs to make informed investment decisions. We have a team of financial advisors who can help you in choosing the right investment as per your financial goals, risk appetite, and time horizon.