How To Invest In Government Bonds As An NRI?

Government bonds are debt instruments issued by the state and central governments for the purpose of raising loans or any other purpose as notified.

The Reserve Bank of India (RBI) has designed a platform for resident Indians and NRIs to participate and invest in these bonds.

The bond's tenure can range anywhere between 181 days to 40 years.

Also, based on your preferences and financial goals you can pick a suitable bond.

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What Are Government Bonds?

Government bodies issue bonds with an objective of raising money from the public to fulfill certain developmental objectives.

These bonds do not attract any taxes which allows you to invest and save taxes against the interest earned.

If you hold NRO / NRE FDs, you can invest in government bonds as they are available to trade in the secondary market.

You can even sell these bonds in the secondary market or use it as a collateral to secure a loan against it.

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What is a Fully Accessible Route(FAR)?

The RBI in consultation with the Govt. of India has introduced Fully Accessible Route.

It enables the non-residents including NRIs to invest in specified Govt. bonds. 

According to the FAR, any person resident outside India can invest in specified government bonds without any investment ceiling limit.

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Types Of Bonds In India For NRIs

Public Sector Unit (PSU) Bond

PSU bonds are issued by the public sector companies where the government has a bare minimum of 51% shareholding.

Before you invest it is essential that you check a bond’s credit ratings. For instance, AAA rated PSU bonds offer safety and carry low-risk.

Features of PSU Bonds

• It is suitable to you if you have a low risk-appetite
• The investment horizon ranges between 10 to 15 years
• The yield is higher than an FD

Benefits of PSU Bonds

• Any interest you earn on a PSU bond is tax-free under Section 10 (15) (IV) (h)
• Your investment is safe as the fund has the government backing unlike corporate bonds and the perceived risk is low
• As the funds generate fixed interest earnings, constant monitoring might not be necessary.

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Capital Bonds For NRIs

Capital gain bonds are the tax saving bonds popularly known as the Sec 54EC bonds. 

You can invest in the capital bonds to avoid paying taxes on the sale of your investment property in India.

It is essential to note that you need to invest within six months of receiving capital gains.

In India very few corporations can issue capital bonds, namely, 

• National Highway Authority of India (NHAI),  
• Rural Electrification Corporation (REC), 
• Power Finance Corporation

Features of Capital Gain Bonds

• You can invest up to INR 50 lakhs of your capital gains proceeds.
• You can earn an interest rate of 5 to 5.75% paid annually.
• Generally, these bonds come with a lock-in period of 5 years

Benefits of Investing in Capital Gain Bonds for NRIs

• Investing the long term capital gains earned on the sale of a long term capital asset can help you save tax on LTCG. 
• Capital gain bonds earn stable returns in the form of interest on investment.
• These bonds are backed by the Government of India and thus are considered to be safe and low risk investments. 

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Treasury Bills – Guaranteed Returns

Treasury bills are money market instruments issued by the government of India that are short-term in nature. 

You can buy T-bills issued at a discount rate and earn the face value at maturity. 

Any gains realized at maturity are subject to the Short Term Capital Gains (STCG) with tax being deducted at source.

Features of T-Bills

• Minimum investment amount is INR 10,000
• You can invest in T-bill with three different maturities - 91 days, 182 days, 364 days

Benefits of T-Bills for NRIs

• T-Bills are short-term investments with a maximum tenure up to an year. 
• Since the treasury bills are issued by the government they are low risk investment options.
• T bills offer guaranteed returns in the form of interest.

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Zero Coupon Bonds

Zero coupon bonds are bonds that are issued at a deep discount against the face value.

At maturity you will receive an amount equal to its face value. You will not receive regular interest or coupon payments against these bonds.

Any gains realized at maturity are subject to the capital gains tax being deducted at source.

Features of Zero Coupon Bonds

• Available at a discount to the face value
• Volatile when compared to regular bonds

Benefits of Zero Coupon Bonds for NRIs

• There is no reinvestment risk
• You can earn fixed return at maturity

Note: Reinvestment risk is the risk of not being able to reinvest your coupon payment at the rate equal to your current return.

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Benefits Of Investing In Government Bonds For NRIs

You can derive the following benefits by investing in the government bonds

Diversification Of Investments

By investing in government bonds your principal amount is safe and secure. These are a good investment option to counter the equity risks in your portfolio. 

During a stock market distress, you can consider diverting some investments into bond markets. By doing so you can safeguard your principal and earn moderate returns.

Long-term Investment Options

The RBI has enabled NRIs to invest in government securities that range between 5 to 30 years.

You can consider investing in these securities if your plan is to hold investments for the long-term.

Bonds Offer Low-Risk

Government bonds generally bear low risk as they are secure investments that guarantee principal repayment.

And mostly suited if you possess low-risk tolerance levels or you are in your retirement period.

PSU Bonds Are Tax-free

Suppose you invest in PSU bonds, any interest accrued on it is entirely tax-free under Sec 10 (15) (IV) (h).

However, realized capital gains at maturity might be subject to TDS based on the period of holding.

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How to Invest in G-Sec Bonds in India?

The RBI had earlier launched ‘RBI retail direct’ to ensure that government bonds are accessible to all (including NRIs).

• Visit the RBI retail direct website and enter your basic details, namely,some text
  • Full name as per PAN
  • Account type - single or joint
  • Email-ID
  • Mobile number
  • Login name
  • PAN
  • Date of birth
• Verify your details with an OTP sent to your registered contact number.
• Review entered basic information and click ‘Submit’
• You will receive an application number as part of acknowledgement
• Initiate your KYC process by opting between CKYC or offline KYC if you are in India.
• Enter your Aadhaar details and provide the consent to use your Aadhaar data.
• Next, upload Aadhaar KYC file downloaded from the UIDAI portal and verify details.
• Review your additional details, tax residency certificate along with your consent to comply with regulatory guidelines
• Upload your signature with white background
• Select your bank account from the list considering whether you plan to repatriate (NRE) or not (NRO) and provide nominee details.
• Next, proceed with the video KYC

Upon successful completion of your video KYC verification you will receive your login details.

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Conclusion

The government bonds are a safer and reliable option in comparison to equity shares and other market linked instruments.

If you are an NRI looking for an alternative to NRE/NRO FDs, you can consider investing in government bonds.

If you are looking to diversify your investments or if the market is behaving strangely then opting for these bonds can give you the much needed stability.

And alternative to bond investing are debt mutual funds. Debt mutual funds invest in fixed income securities and offer a diversified portfolio.

Read our blog on ​​Bonds Vs Debt Mutual Funds: Which One Is Better For NRIs?

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Investing In Government Bonds As An NRI: Frequently Asked Questions (FAQs)

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Can an NRI invest in government bonds issued in India?

Yes, as an NRI, you can invest in government bonds and Public Sector Undertaking bonds issued in India. 

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Can NRI invest in capital bonds to save capital gains tax?

Yes, as per Sec 54EC, any realized capital gains from sale of Indian property or long term capital asset is exempt from capital gains tax.

Under this Sec, you can reinvest up to INR 50 lakhs.

The above Section is subject to certain terms and conditions. It may be wise to seek the help of a tax-expert.

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Is interest on Indian government bonds tax free?

The government entities issuing fixed-income securities carry pre-fixed interest rates. 

And, any interest earned on these government bonds is tax-free. 

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