NRIs can now invest in Sovereign Green Bonds this new way; Know how the impact on taxation of gains
The scheme for eligible individuals to invest in Sovereign Green Bonds (SGrB) through the International Financial Services Centre (IFSC) was announced by the Reserve Bank of India (RBI) on August 29, 2024. IFSC is located in GIFTY city in Gandhinagar, Gujarat. Non-resident Indians (NRIs) wishing to invest in long-term Indian government bonds can now do so through the IFSC route in SGrB.#sr_widget.onDemand p, #stock_pro.onDemand p{font-size: 14px;line-height: 1.28;} .onDemand .live_stock{left:17px;padding:1px 3px 1px 5px;font-size:12px;font-weight:600;line-height:18px;top:9px} #sr_widget.onDemand .sr_desc{margin:0 auto 0;} #sr_widget.onDemand .sr_desc{color: #024d99;margin-top:10px;} #sr_widget.onDemand .crypto .live_stock .lb-icon{8px 6px 5px 3px !important} #sr_widget.crypto.onDemand a.text{border-bottom:1px solid #ccc;padding-bottom:5px;display:block;width:100%} #sr_widget.onDemand .sr_desc .text p, #stock_pro.onDemand .sr_desc .text p{font-size:12px;font-weight:400;} Read below to find out if SGrBs are worth investing in for NRIs and what their advantages and disadvantages are, including the tax implications.
What are Sovereign Green Bonds (SGrB)
In the Union Budget for the financial year 2022-23, the government announced the issuance of SGrBs, which aim to use the funds for green infrastructure investments, thereby reducing the Indian economy's carbon intensity. After the launch of SGrBs, the government launched Green Fixed Deposits (FDs), which also had a similar aim: to use the funds for green infrastructure investments.So, if you are looking for green investing options, you may consider investing in SGrBs or Green Fixed Deposits (FD), if eligible.
Who is eligible for investing in Sovereign Green Bonds through IFSC
The Reserve Bank of India notified the scheme on August 29, 2024, for trading and settlement of Sovereign Green Bonds in IFSC. "Retail and NRI investors can invest in Sovereign Green Bonds (SGrBs). Retail investors can do so through the RBI Retail Direct website or their brokerage firm if available. NRIs can also invest in these bonds as 'specified securities' under the Fully Accessible Route (FAR)," says Vijay Kuppa, CEO, InCred Money.
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CA Prakash Hegde explains that even PROIs are also eligible to invest in SGrB. "Under this Scheme, eligible investors, including Persons Resident Outside India i.e. PROI (which has a broader meaning than 'NRI'), are allowed to trade in SGrBs," says Hegde.
Karan Rijhsinghani, Director - Head of Products & Advisory, Atom Prive Wealth informs that under the FAR route, apart from NRIs, Foreign Portfolio Investors (FPIs) and Overseas Citizens of India (OCIs) can also invest in SGrB.
What is the interest rate being offered for various SGrBs
Abhijit Roy, CEO, GoldenPi shares the data regarding how many SGrBs have been issued till date and their respective interest rates.Table 1: SGrB interest rates and ISIN number
Source: GoldenPiHow to invest in SGrBs?
Rohit Raghavan, Partner at Saraf and Partners says that retail investors can invest in SGrBs in non-competitive bidding through a Retail Direct Gilt Account or submit the bid indirectly through a permitted Aggregator/Facilitator.According to the Zerodha website as of September 12, 2024, "The process for investing in SGrBs is the same as investing in G-Secs, T-Bills or SGBs.
To invest on the Kite web:
Login to kite.zerodha.com.
Click on Bids.
On the Kite app, tap on Bids and then Govt. Securities.
Note: The funds will be debited from your trading account. Please ensure to maintain sufficient funds in your trading account on the issue end date."
How might SGrBs get taxed for NRIs
CA Prakash Hegde decodes the taxability of such bonds in some scenarios:Scenario 1: NRI purchased Sovereign Green Bonds through RBI retail direct and sold them on the stock exchange (NSE)
Since these Bonds are listed securities in NSE,
(i) If the holding period is 12 months or less - SGrBs would be short-term assets. Since the gain would be STCG, the rate of tax will be 20% (if the sale is on or after July 23, 2024)
(ii) If the holding period is more than 12 months - SGrBs would be long-term assets. Since the gain would be LTCG, the rate of tax will be 12.5% (if the sale is on or after July 23, 2024). Indexation is no longer applicable, effective July 23, 2024.
"Even if an NRI purchased Sovereign Green Bonds through the stock exchange and sold it on the stock exchange itself then also the tax treatment would be the same as stated above," says Hegde.
Scenario 2: SGrBs redeemed at maturity
"Interest from bonds will be taxable as income from other sources at the applicable tax rates. From my study, it appears that the redemption amount would be equal to the face value of the bonds. If there is any gain or loss, the same will be treated as capital gain/loss depending on the period of holding as outlined above," says Hegde.
Are SGrBs sold in IFSC tax-free?
According to Dhanraj Bhagat, Partner, Grant Thornton Bharat, SGrB held in a domestic demat account cannot be transferred or settled in IFSC. "Sovereign Green Bonds held in domestic demat account/ onshore gilt cannot be transferred to demat/ securities account in IFSC and vice versa. Hence, SGrBs bought from secondary markets in India may not be allowed to be traded on IFSC," he says.According to Hegde, "As per the provisions of the Income Tax Act [section 47(viiab)] transfer of some capital assets like GDRs, derivatives, foreign currency-denominated bonds, units of mutual fund/business trust/investment trust/AIF etc. made by a non-resident in a stock exchange in IFSC are not treated as transfer. Therefore, the gains made from such transfers by non-residents are not taxable. However, SGrBs are not yet notified under the above section. Therefore, as things stand today, when an NRI sells SGrBs through IFSC, the gain will be taxable in his hands. Therefore, it makes no difference (from the income tax perspective) whether he sells in NSE or IFSC."
"NRIs trading in IFSC instead of NSE (secondary market) may benefit from ease of accessing sovereign green bond markets without obtaining FPI license, ease of buying and selling in foreign currency with reduced transaction cost and potential concessional tax regime. However, the operating guidelines to be issued by the IFSCA in due course may provide more clarity on the advantages of NRI trading in such SGrBs in IFSC," says Bhagat.
What are the advantages and disadvantages of investing in SGrBs?
Here are the advantages of investing in SGrBsGreen investing objectives: According to the Zerodha website as of September 12, 2024, "When a government issues bonds, there's no restriction on what kind of projects or purposes it can spend on…. Unlike regular bonds, the money raised from green bonds can only be spent on green projects as defined by accepted standards." "As the world has increased their focus more on solving climate change and other environmental issues, green bonds have grown popular among investors looking to match their financial goals with their principles and contribute to good change," says Harsimran Sahni, Executive Vice President & Head - Treasury, Anand Rathi Global Finance.Higher interest rate than NRO deposits: "These bonds (SGrB) give higher interest rates than non-resident ordinary (NRO) deposits. For example - NRO gives anywhere between 3-7% interest rates depending on tenure whereas, SGrBs gives ~7.1-7.4%," says Kuppa from InCred Money.Sovereign rating: Like government securities (G-Sec), SGrBs also have a sovereign guarantee of the Indian government. "Since these bonds are issued by government entities, they carry next to nil credit or default risk. The repayment of principal and interest isn't dependent on the success of the projects funded," says Kuppa. SGrBs can be used for margin trading on stock exchanges: If you are a stock market trader then you can use "SGrBs to pledge as a margin on exchanges," says Sahni. According to Roy from GoldenPi, "SGrBs present several compelling reasons for retail investors
to consider them:
Alignment with Personal Values: For investors driven by environmental and social considerations, SGrBs offer a unique opportunity to contribute directly to sustainable projects. This ethical alignment can be a powerful motivator, making SGrBs a preferred choice for those who wish to see their investments support green initiatives like clean energy, sustainable infrastructure, and climate resilience.Portfolio Diversification: Including SGrBs in an investment portfolio adds a socially responsible dimension without significantly altering the risk-return balance. This diversification can be beneficial for investors seeking to balance their portfolios with a mix of high-yield corporate bonds and lower-yield government bonds that support a cause."
Disadvantages of investing in SGrBs:
Kuppa says,
"No Tax Benefits: There are no special tax advantages for investing in sovereign green bonds. Interest earned is taxed according to your income slab. S
Limited Liquidity: Like other government bonds, SGrBs are listed on exchanges, but they may lack liquidity. If you plan to hold these bonds until maturity, it's best to invest.
Risk of Greenwashing: Environmental claims might be made without sufficient proof, meaning the projects funded might not deliver a net environmental benefit."
What do retail investors of SGrBs need to know
According to Raghavan, "In auction for SGrBs, the government earmarks certain percentage of the amount, capped at 5% of aggregate nominal value of the issue, to be allotted to individuals and institutions under the Scheme for Non-Competitive Bidding Facility. With a view to encouraging wider participation and retail holding of Government securities, retail investors are allowed participation on "non- competitive" basis. Participation on a non-competitive basis in the auctions is open to a retail investor who:Does not maintain current account ("CA") or Subsidiary General Ledger ("SGL") account with the Reserve Bank of India; andSubmits the bid indirectly through an Aggregator/Facilitator permitted under the scheme; orMaintains the 'Retail Direct Gilt Account' ("RDG Account") with RBI." #sr_widget.onDemand p, #stock_pro.onDemand p{font-size: 14px;line-height: 1.28;} .onDemand .live_stock{left:17px;padding:1px 3px 1px 5px;font-size:12px;font-weight:600;line-height:18px;top:9px} #sr_widget.onDemand .sr_desc{margin:0 auto 0;} #sr_widget.onDemand .sr_desc{color: #024d99;margin-top:10px;} #sr_widget.onDemand .crypto .live_stock .lb-icon{8px 6px 5px 3px !important} #sr_widget.crypto.onDemand a.text{border-bottom:1px solid #ccc;padding-bottom:5px;display:block;width:100%} #sr_widget.onDemand .sr_desc .text p, #stock_pro.onDemand .sr_desc .text p{font-size:12px;font-weight:400;}
This story originally appeared on: India Times - Author:Faqs of Insurances
