India is home to the largest debt market in Asia. The Indian debt market attracts investments from all over the world by giving guaranteed returns. It’s no surprise that even non-resident Indians (NRI) who prefer investing in real estate are willing to participate in it. Though the Indian market offers several investment opportunities to NRIs, bonds are one of their best options.
What are NRI Bonds?
On April 1st 2020, NRIs were allowed to invest in these bonds after the government made them available through the ‘Fully Accessible Route’ to the NRIs. This means that NRIs can now invest in 5-year, 10-year and 30-year bonds without a maximum ceiling limit. The Reserve Bank of India (RBI) issues government securities in the form of bonds.
These bonds are entirely risk-free and offer guaranteed returns. Moreover, they offer better yields than other similar investments. Hence, they are the perfect instrument for NRIs to park their funds in them.
Types of NRI Bonds in India
Following are the different types of NRI bonds.
1. Public Sector Units (PSU) and Capital Bonds
Public sector bonds are tax-free bonds. The interest accrued on them is tax-free under section 10 (15) (IV) (h). However, investments in them do not qualify for a tax exemption. In contrast, the capital gains bonds offer tax exemption under section 54EC, but they have a lock-in period of three years.
2. Secure Corporate Bonds and Non-Convertible Debentures (NCDs)
Corporations or companies issue these bonds with a tenure ranging from 1-20 years. They are tradable instruments.
3. Bharat Bond ETF & FOF
A bond ETF invests in bonds listed on the exchange. Edelweiss asset management company manages this Government of India initiative. Its portfolio consists of ‘AAA-rated’ bonds of Central Public Sector Enterprise (CPSE). The ETF has a maturity date but trades on the stock exchange.
4. Debt mutual funds
Another popular way of investing in bonds in India is through debt mutual funds. NRIs can invest in debt mutual funds after they submit Foreign Account Tax Compliance Act (FATCA) declaration through an NRE (non-resident external) or NRO (non-resident ordinary) account.
Process for Investing in NRI Bonds in India
To invest in bonds, NRIs can use an online Demat account or give a power of attorney (PoA) to a known person in India who can then apply through a physical route on behalf of the NRI. One can invest in bond investment through both NRE and NRO accounts on a repatriable or non-repatriable basis. Also, investors can apply through both online and offline modes. The online mode requires a Demat account, whereas the offline application requires a rupee-denominated cheque or bank draft.
- Repatriable basis: Investors have to submit the online and offline application using a Demat account linked to the NRE account and a rupee-denominated cheque or bank draft linked to the NRE account, respectively.
- Non-repatriable basis: Investors have to submit the 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.
It is important to note that the bond issue only opens for subscription for a limited period. In case of an oversubscription of the issue, it closes for the subscription. Hence, NRI investors only have a limited time frame to invest in the bonds. They will have to act quickly if they want to invest in them.
Procedure for Selling the Investment in 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 either to NRE or NRO account on a repatriable basis in case 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. In case the sale is made offline, a cancelled cheque of the respective account has to be attached along with the sale application.
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Advantages of Investing in Bonds for NRIs
- Risk-free: NRI bonds are considered safe as the underlying instruments are government securities.
- Fixed returns: Bonds pay fixed interest in the form of coupon rate to bondholders until they mature. Hence the investor gets guaranteed returns in the form of interest.
- Diversification: 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.
- Flexible tenure options: NRIs can invest in bonds that have maturity ranging from 91 days to over 40 years. This gives them the flexibility to choose a bond for investment based on their goals and requirements.
- Repatriable: Investors can transfer the interest and investment proceeds to the NRI’s account abroad. However, the investment is made through the NRE account.
- Liquidity: 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.
- Financial security: NRIs invest in India to earn returns which can be transferred back to their country of residence or to provide for their family living in India. The interest from the bonds can be transferred into Indian accounts from the NRE or NRO account to be used in India.
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Things to Consider Before Investing in NRI Bonds in India
- Taxation: 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. The capital gains are taxable if the investors sells the bond on the stock exchange before maturity. Short-term capital gains (gains earned within a year from the date of investment) 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 10.3%. The tax is deducted as Tax Deducted at Source (TDS) before crediting the post-tax gains to the NRI’s account.
- Investment through designated branch: NRIs can invest in shares, bonds and other securities only through the stock exchange and a designated branch authorized by the RBI.
- RBI’s permission: To invest on a non-repatriable basis, the maximum permission given by the RBI is five years. Post this, the dealer has to get the permission renewed every five years.
- Limit on investment amount: 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.