Can NRIs Invest in Bonds in India? Here is Everything You Need to Know

For Non-Resident Indians (NRIs), the Indian market presents multiple investment avenues, real estate, mutual funds, equities, and more. But if you’re looking for safety, steady returns, and minimal risk, bonds are one of the most dependable choices. Recognising this, the Indian government introduced the Fully Accessible Route (FAR) on April 1st, 2020, allowing NRIs to invest in certain government bonds without any investment ceiling. 

Let’s understand what NRI bonds in India are, the types available, how to invest in them, and what to keep in mind before you do.

What are NRI Bonds?

NRI bonds refer to debt instruments in which NRIs can invest their money. These include government securities, public sector bonds, corporate bonds, and other fixed-income products. These bonds are risk-free and offer fixed returns. Moreover, they offer better yields than other similar investments. 

Types of NRI Bonds in India

Following are the different types of bonds in India for NRIs: 

1. Government Bonds for NRIs

Issued by the RBI, government bonds for NRI are considered the safest fixed-income instruments in India. NRIs can directly purchase G-Secs, state development loans (SDLs), and treasury bills (T-bills). These carry sovereign backing, making them virtually risk-free.

But NRIs cannot invest in sovereign gold bonds (SGBs) or floating rate bonds. 

2. Public Sector Units (PSU) and Capital Bonds

Public sector unit (PSU) bonds are typically tax-free bonds, meaning the interest earned is exempt. However, investments in them do not qualify for a tax exemption. In contrast, capital gains bonds are ideal for individuals who have sold property in India. These offer tax exemptions under section 54EC, but they have a lock-in period of three years.

3. Corporate Bonds for NRIs & NCDs

Indian corporate bonds for NRIs, including non-convertible debentures (NCDs) issued by private or public companies are also available. These offer higher yields but come with some credit risk. Most are rated by agencies such as CRISIL or ICRA, and top-rated options (AAA) are generally preferred.

4. Debt Mutual Funds 

Another popular way of investing in bonds in India is through debt mutual funds or bond ETFs. NRIs can invest in debt mutual funds after they submit a Foreign Account Tax Compliance Act (FATCA) declaration through a non-resident external (NRE) or non-resident ordinary (NRO) account.

Process for Investing in NRI Bonds in India

Here are two ways to invest in bonds for NRIs:

• Online: Using a demat account linked to an NRE/NRO account
• Offline: Through a PoA (Power of Attorney) holder in India and a rupee-denominated cheque or bank draft

NRIs can invest in bonds through both NRE and NRO accounts on a repatriable or non-repatriable basis.

• Repatriable basis: Investors must submit an online and offline application using a demat account linked to the NRE account, along with a rupee-denominated cheque or bank draft linked to the NRE account.
• Non-repatriable basis: Investors must submit an online and offline application using a demat account linked to the NRO and a rupee-denominated cheque or bank draft linked to the NRO account, respectively.

Procedure for Selling NRI Bonds in India

Once invested in the bond, it can either be held till maturity or sold on the stock exchange before maturity. Upon sale, the investor receives the face value of the bond. The interest and proceeds of the investment will be credited to either the NRE or NRO account on a repatriable basis, provided the purchase is initiated through the NRE account.

If the purchase is initiated through the NRO account, the proceeds will be credited only to the NRO account on a non-repatriable basis.

If the sale is made through a demat account, the interest and principal amount automatically gets credited to the linked bank account. If the sale is made offline, a cancelled cheque from the respective account must be attached to the sale application. 

Advantages of Bond Investment for NRIs

Fixed-income bonds for NRIs offer several advantages: 

• Bonds are considered safe as the underlying instruments are government securities.
• Bonds pay fixed interest in the form of coupon rates to bondholders until they mature. Hence, the investor gets fixed returns in the form of interest.
• By investing in debt securities in India, NRIs can geographically diversify their investment portfolio. This lowers the risk of their entire portfolio as bonds bring stability to it.
• Investors can transfer the interest and investment proceeds to the NRI’s account abroad. 
• NRI bonds are very liquid investments. Even if investors choose a longer investment horizon, they can easily sell it in the secondary market or take a loan against it in the event of a cash shortage.

Things to Consider Before Investing in NRI Bonds in India

NRIs should consider the following points before investing in bonds in India: 

• The interest from the bonds is taxable as per the investor’s income tax slab rate and falls under the ‘Income from Other Sources’ head. If the interest is from tax-free bonds, then the NRI is not liable to pay taxes. Capital gains are taxable if the investors sell the bond on the stock exchange before maturity. 

Short-term capital gains (gains earned within a year from the date of investment) on a listed bond are taxable as per the investor’s income tax slab rate. In contrast, the long-term capital gains are applicable after one year from the date of investment and are taxable at 12.5% without any indexation benefits. Also, gains from unlisted bonds are considered STCG and taxed at the investor’s tax slab. 

• NRIs can invest in shares, bonds and other securities only through the stock exchange and a designated branch authorised by the RBI.
• NRI investments in any company’s shares or bonds should not exceed more than 5% of the total paid-up capital or value of the company’s bond series.

Conclusion

For NRIs looking for a more reliable, long-term investment option in India, bonds offer safety, steady income, and flexibility. With the introduction of the fully accessible route and increasing transparency in the Indian debt market, investing in NRI bonds in India has never been easier.

Whether you prefer government-backed securities, tax-saving capital bonds, or high-yield corporate options, there’s a bond that fits your goals. And with the ability to invest on a repatriable basis, NRIs can now grow their wealth in India while staying financially connected across borders.

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