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Understanding Infrastructure Bonds for NRIs

Investment Avenues and Benefits Explored
min read
February 3, 2024

Unlocking the Potential of Infrastructure Bonds for NRIs

For Non-Resident Indians (NRIs) looking for a stable and potentially profitable investment opportunity, infrastructure bonds come across as a noteworthy option. These bonds offer a blend of security and returns, providing a unique opportunity for NRIs to participate in India's developmental ambitions while earning a fixed income. This financial mechanism enables the pooling of funds to finance large scale infrastructure projects that are essential for the nation's growth.

What Are Infrastructure Bonds?

Infrastructure bonds are long-term investment tools issued by the government or corporate entities to fund critical projects pertaining to the nation’s physical infrastructure. Given the considerable capital outlay and long gestation period for infrastructure projects, these bonds play a crucial role in channeling funds from investors like NRIs who are looking for a steady income over a longer horizon. Infrastructure ventures like roads, ports, power plants, and urban development schemes are typically financed through such investments. By purchasing these bonds, NRIs do not just secure a financial asset, but they also contribute to bridging the infrastructure financing gaps in India.

Investing in infrastructure bonds is distinguished by tax exemption under the Income Tax Act, to a limit specified by the government. This provides a tangible incentive for NRIs to consider infrastructure bonds over conventional fixed-income securities. Furthermore, these bonds are often rated by credit agencies, offering insights into their credibility and the associated risk, thus aiding NRIs in making informed investment decisions.

Investment Process and Eligibility

NRIs desiring to invest in Indian infrastructure bonds must comply with the FEMA directives. These bonds can be subscribed through NRE (Non-Resident External) or NRO (Non-Resident Ordinary) accounts, which need to be credited with the investment amount in INR. The process usually involves completing the application form, providing KYC documents, and choosing between cumulative or payout options as per individual financial planning. In the digital era, the investment process has been greatly simplified with online platforms providing easy access to applications and related services.

However, it is vital to understand that the investment process also includes scrutiny of the bonds' potential performance. Factors such as macroeconomic conditions, industry cycles, and government policies can affect the returns on these bonds. Thus, due diligence regarding the issuer's financial health and project feasibility becomes integral before making investment decisions.

The Risks and Returns

While infrastructure bonds present opportunities, they carry risks akin to any financial asset. The principal risks include interest rate volatility, issuer's creditworthiness, reinvestment risks, and potential changes in tax laws. Prospective investors should accordingly weigh the bond's tenure, credit rating, and prevailing market conditions against their investment horizons and liquidity needs. Typically, infrastructure bonds offer slightly higher yields compared to traditional bonds, acknowledging the higher risk embedded in financing infrastructure projects. However, the interest earned may be subject to double taxation relief based on India's tax treaty with the country of residence of the NRI.

Furthermore, the lock-in period associated with these instruments ensures a fixed return over the stipulated timeframe, usually ranging from 5 to 15 years. This term allows the funded infrastructure projects to materialize, thereby bearing fruit in the form of interest incomes for the investors. It is important for NRIs to analyze their long-term financial objectives and immediate cash flow requirements before aligning their investment in infrastructure bonds, considering the significant lock-in period which restricts liquidation prior to maturity.

Our extensive article below furnishes a deeper exploration into the nuances of infrastructure bonds tailor-made for NRI investors, offering them comprehensive understanding and guidance to navigate this potent investment landscape.

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Aayush is a strategic growth marketer with over 6 years of experience working in the US and European markets for various financial services companies. He has a proven track record of success in helping businesses grow, increase revenue, and improve marketing strategies.

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