Sovereign green bonds for NRIs offer credit-risk-free returns in long term

Investors should be mindful of exchange rate risk and limited liquidity in secondary market

The Reserve Bank of India (RBI) has allowed non-resident Indians (NRIs) to invest in the government’s sovereign green bonds (SGrBs) issued for 2023-24. The government plans to borrow Rs 20,000 crore through the bonds in the current financial year.

SGrBs are used to fund environmental projects. “To tap growing environmental consciousness within and outside India, the government issues SGrBs to mobilise resources for green infrastructure and to reduce the economy’s carbon intensity,” says Anshul Gupta, co-founder and chief investment officer, Wint Wealth.

Key features

A SGrB works like a regular central government bond. Interest is paid twice a year at a fixed rate. Bond issuers enjoy a ‘greenium,’ a slightly lower interest rate investors are willing to accept. “They offer a little less yield than non-green sovereign bonds,” says Jigar Patel, a member of the Association of Registered Investment Advisors (ARIA).

Five-year SGrBs were auctioned by the RBI in January 2023 at an annual yield of 7.10 per cent. Another tranche of 10-year bonds auctioned in February 2023 yielded 7.29 per cent.

Lock into credit-free instrument

NRIs have now got another avenue for exposure to the Indian market. “These bonds offer higher returns than non-resident ordinary (NRO) deposits. Investors get to lock into a long-term and safe instrument backed by the government,” says Mrin Agarwal, founder and director, Finsafe India.

Patel says: “If investors need cash, they can sell these bonds in the secondary market or use them as collateral to borrow funds.”

Jinal Mehta, a certified financial planner and founder of Beyond Learning Finance, says NRIs can invest in these bonds without any cap.

Exchange rate, liquidity risk

NRIs can repatriate the income and proceeds out of India without limits. “Investing in these bonds will expose NRIs to exchange rate risk,” says Gupta.

Mehta adds that trading activity has been low so far, making these bonds illiquid.

These bonds do not enjoy any special tax advantages. “Both the interest income and the capital gains from these bonds are subject to standard taxation,” says Ankit Jain, partner, Ved Jain & Associates.

Interest earned is categorised as income from other sources and is taxed at the investor’s income-tax slab rate.

The taxation of capital gains depends on the investor’s holding period. For bonds sold within three years of purchase, gains are added to the investor’s income and taxed at the slab rate. “Long-Term Capital Gains (LTCG) incur a flat 20 per cent rate after indexation benefit. Additionally, the tax deducted at source (TDS) rates of 10 per cent for individuals and 20 per cent for non-individuals apply unless a valid Form 15G/15H is submitted to the bond issuer,” says Maneet Pal Singh, partner, I P Pasricha & Company.

SGrBs offer lower returns than non-green government securities (G-Secs). "From a monetary standpoint, G-secs and T-bills are better fixed-income opportunities for NRIs as they offer slightly higher yields. NRIs need to decide whether they would like to chase slightly higher returns or contribute towards improving sustainable public infrastructure in their motherland,” says Gupta.

Who should go for the bonds?

Environment-conscious NRIs looking for a fixed-income instrument that does not carry credit risk may go for these bonds. “Anyone keen on investing in equities, someone who wants to take credit risk for higher returns, or someone whose goal is to maximise returns may avoid these bonds,” says Patel.

Typically, these bonds have longer maturities. Mehta says short-term investors should also avoid these bonds.