NRI Investments in NCDs: Eligibility Rules and Tax Implications

Introduction

Companies issue Non-Convertible Debentures for those looking for a secure, long-term investment. If you are keen on investing beyond Stocks and Mutual Funds, Debentures can be a great choice. They offer fixed returns at low risk.

What are non-convertible debentures?

Companies in India issue an NCD to raise money for their business. It helps raise funds without diluting Equity. It has a fixed tenure and fixed interest rates, but Debentures cannot get converted into Equity Shares of the company. The maturity period ranges between 90 days to 30 years, and it offers a return rate higher than that provided by Bank Fixed Deposits.

NRI Investments in NCD

The Reserve Bank of India allows non-resident Indians to invest in India. There are, however, specific rules based on the investment product and NRIs wishing to invest in India. NRIs can invest in NCDs on a repatriation and non-repatriation basis. Persons of Indian origin and NRIs can make NCD Investment in companies offering the same if the rules of the issuing company allow them. In India, rarely a company allows an NRI to invest in a public issue NCD.

According to the eligibility criteria, all companies mention applications from foreign nationals and NRIs, who are based in the USA or domiciled in the USA, or those residents, or subject to the taxation laws of the USA, gets rejected. Further, an NRI must furnish a receipt statement of the remittances and an issue statement of NCDs within 30 days of investment to the RBI.

For investments on a repatriation basis, the holding of the NRI for every series of NCDs should not be more than the prescribed limit for the issue of Convertible Debentures and Equity Shares for FDI. It is important to remember that all NCDs usually disallow investments by NRIs. Hence, always check the terms and conditions and read the documents carefully to determine if you are eligible to apply.

Additional Read: Comparing NCDs/Bonds and Debt Mutual Funds

NCD taxation rules applicable on NRIs

When an NRI invests in NCDs in India, they need to follow the taxation rules in the country. There are two types of taxes applicable: Tax Deduction at Source at the rate of 20% on the interest earned and Long-Term Capital Gain Tax at 20%.

So, if you earn an interest of Rs. 20,000 from the investment, the TDS applicable will be Rs. 4,000 at the rate of 20%, and the balance Rs 16,000 gets credited to the account. Additionally, the investment cannot get redeemed for three years. After three years, Long-Term Capital Gain Tax will be applicable on income generated on the sale of NCDs at 20%.

Additional Read: Can NRI invest in IPO?

As mentioned, the RBI permits NRIs to invest in NCDs, but all companies are not open to NRI investors. If you happen to invest, you should follow the necessary regulations. Also, you cannot buy NCDs from the secondary market in India.

Disclaimer:

ICICI Securities Ltd.( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Centre, H. T. Parekh Marg, Churchgate, Mumbai - 400020, India, Tel No : 022 - 2288 2460, 022 - 2288 2470.  I-Sec is acting as a distributor to solicit bond and debentures related products. All disputes with respect to the distribution activity, would not have access to Exchange investor redressal forum or Arbitration mechanism. The contents herein above shall not be considered as an invitation or persuasion to trade or invest.  I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. Investments in securities market are subject to market risks, read all the related documents carefully before investing. The contents herein mentioned are solely for informational and educational purpose.