News Excerpt:

Recently, 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.

About Sovereign green bonds:

• SGrBs are used to fund environmental projects. 
• The government issues SGrBs to mobilise money for green infrastructure and to reduce the economy's carbon intensity to tap into growing environmental consciousness both within and outside India.

Key features of SGrB:

• A SGrB functions similarly to a standard central government bond. 
• Interest is paid at a predetermined rate twice a year. 
• Bond issuers enjoy a ‘greenium,’ a slightly lower interest rate that investors are willing to accept. 
• It offers a little less yield than non-green sovereign bonds.

Recent Bond Auction:

• The RBI auctioned five-year SGrBs in January 2023 at a 7.10 percent annual rate. 
• Another 10-year bond tranche auctioned in February 2023 yielded 7.29 percent.

Benefits to the NRIs:

• These bonds are more profitable than non-resident ordinary (NRO) deposits. 
• Investors can lock in a long-term, safe instrument backed by the government.
• If investors require funds, they can sell these bonds on the secondary market or use them as collateral to borrow money.
• NRIs can invest in these bonds with no restrictions.

Issues Related to SGrB:

• NRIs have no restrictions on repatriating their earnings and profits from India. 
• If they invest in these bonds, NRIs will be exposed to exchange rate risk.
• So far, trading activity has been modest, rendering these bonds illiquid.
• These bonds do not have any tax advantages. 
• The interest income and capital gains from these bonds are both taxed at the regular rate.
• Interest earned is categorised as income from other sources and is taxed at the investor’s income-tax slab rate.
• SGrBs offer lower returns than non-green government securities (G-Secs), Which can affect the success of SGrBs. 
• 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 to chase slightly higher returns or contribute towards improving sustainable public infrastructure in their motherland.
• These bonds have longer maturities; short-term investors will also avoid these bonds.

Taxation on SGrBs:

• The taxation of capital gains is determined by the holding time of the investment.
• 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) are taxed at a flat 20% rate after indexation. Furthermore, unless a proper Form 15G/15H is presented to the bond issuer, the tax deducted at source (TDS) rates of 10% for people and 20% for non-individuals apply.

Conclusion:

Hence, SGrBs' success depends on NRIs' personnel demand because environmentally concerned NRIs seeking a fixed-income product that does not carry credit risk may choose these bonds. Anyone interested in investing in equities, taking credit risk for higher returns, or maximising profits should avoid these bonds.

Prelims PYQ

Q. Indian Government Bond Yields are influenced by which of the following?​

    (UPSC 2021)

1. Actions of the United States Federal Reserve​
2. Actions of the Reserve Bank of India​
3. Inflation and short-term interest rates​

Select the correct answer using the code given below.​

(a) 1 and 2 only​

(b) 2 only ​

(c) 3 only​

(d) 1, 2 and 3