What Are Sovereign Green Bonds (SGrBs)?

Sovereign Green Bonds (SGrBs) were introduced by the Indian government in the Union Budget 2022-23 to fund eco-friendly infrastructure projects. The primary goal of these bonds is to reduce India's carbon emissions by investing in green projects. SGrBs ensure that the funds raised are dedicated solely to sustainable initiatives, making them an ideal choice for environmentally conscious investors.

How Can NRIs Invest in Sovereign Green Bonds Through IFSC?

On August 29, 2024, the Reserve Bank of India (RBI) announced that NRIs can now invest in SGrBs through the International Financial Services Centre (IFSC) located in Gandhinagar, Gujarat. Under the new scheme, NRIs can participate in the trading and settlement of these bonds using the Fully Accessible Route (FAR).

Eligible investors, including NRIs and Persons Resident Outside India (PROIs), can trade in SGrBs through the RBI’s Retail Direct platform or brokerage firms. Retail investors can also participate through non-competitive bidding via a Retail Direct Gilt Account (RDG) or through an approved Aggregator/Facilitator.

What Is the Tax Treatment for Sovereign Green Bonds for NRIs?

1. Selling SGrBs on the Stock Exchange (NSE)

If NRIs sell SGrBs within 12 months, the gains are treated as short-term capital gains (STCG) and taxed at 20%.

If the holding period exceeds 12 months, the gains are classified as long-term capital gains (LTCG) and taxed at 12.5%. It is important to note that indexation benefits for SGrBs were removed as of July 23, 2024.

2. Redeeming SGrBs at Maturity

Interest earned from SGrBs is taxable as "income from other sources" at applicable tax rates. If the bonds are redeemed at face value, any capital gains or losses will be determined based on the holding period.

Are Gains on SGrBs Sold in IFSC Tax-Free for NRIs?

Currently, SGrBs are not eligible for the tax exemptions under section 47(viiab) of the Income Tax Act. This means that NRIs selling SGrBs through IFSC will still face tax liabilities, similar to selling on the NSE.

However, NRIs trading in IFSC may benefit from reduced transaction costs and easier access to the sovereign green bond market without the need for an FPI license. The upcoming guidelines from IFSCA may provide additional clarity on the potential tax benefits of trading in IFSC.

Advantages of Investing in Sovereign Green Bonds (SGrBs)

1. Government-Backed Security: SGrBs come with a sovereign guarantee from the Indian government, ensuring minimal credit risk.

2. Attractive Interest Rates: SGrBs offer interest rates around 7.1% to 7.4%, which is higher than the 3-7% offered by NRO deposits.

3. Ethical Investment Option: SGrBs allow investors to contribute directly to environmentally sustainable projects, aligning financial goals with green initiatives.

4. Portfolio Diversification: By including SGrBs, investors can add a socially responsible element to their portfolio without significantly increasing risk.

5. Margin Trading: Investors can pledge SGrBs as collateral for margin trading on stock exchanges.

Disadvantages of Investing in Sovereign Green Bonds (SGrBs)

1. No Special Tax Benefits: While offering environmental benefits, SGrBs do not provide any specific tax advantages. The interest earned is taxed according to your income tax slab.

2. Limited Liquidity: Although SGrBs are listed on exchanges, they may not be as liquid as other investment instruments. Investors should be prepared to hold these bonds until maturity.

3. Risk of Greenwashing: Investors should be aware that not all green projects deliver the environmental benefits they promise, making it important to research the impact of the projects funded by the bonds.

Should NRIs Invest in Sovereign Green Bonds?

For NRIs seeking to invest in India's green economy, Sovereign Green Bonds present a promising opportunity. With government backing, competitive interest rates, and a focus on sustainability, SGrBs are an attractive choice for those wanting to align their financial goals with environmental responsibility.

Though there are no immediate tax benefits, the ethical alignment and portfolio diversification they offer make SGrBs worth considering.

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