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NRI Guide to Investing in Non-Convertible Debentures in India

Uncover the potential of Non-Convertible Debentures for NRIs in India. Learn about eligibility, returns, risks, and tax implications.
11
min read
February 3, 2024
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Introduction to Non-Convertible Debentures (NCDs) for NRIs

Non-Convertible Debentures (NCDs) have emerged as a popular investment choice for Non-Resident Indians (NRIs) seeking secure, long-term investment opportunities in India. These fixed-income instruments, issued by corporations, provide a fixed rate of interest and are ideal for NRIs looking beyond stocks and mutual funds.

What are NCDs?

NCDs are debt instruments issued by public companies in India to raise funds. Unlike convertible debentures, NCDs cannot be converted into equity shares of the issuing company. They come in two forms: secured and unsecured. Secured NCDs are backed by the company's assets, offering lower risk, while unsecured NCDs, lacking such backing, carry higher risk but potentially offer higher returns​​​​.

NRI Investment in NCDs

Eligibility and Application

The Reserve Bank of India (RBI) allows NRIs and Persons of Indian Origin (PIOs) to invest in NCDs in India. However, specific rules set by the Foreign Exchange Management Act (FEMA) must be adhered to. Generally, companies allow NRI investments in NCDs through public offers. NRIs can invest in NCDs on both repatriable and non-repatriable bases, depending on the company's policies​​.

Tax Implications

NRIs need to pay Tax Deducted at Source (TDS) on the interest earned from NCDs. Income earned from the sale of NCDs held for over three years is subject to Long-term Capital Gains (LTCG) tax at the rate of 20%. It's important for NRIs to understand these tax implications both in India and their country of residence​​​​.

Why are NCDs Attractive to NRIs?

Security and Returns

In uncertain markets, NCDs offer better security and returns compared to other investment options. Secured NCDs, backed by assets, provide a safer investment avenue, while unsecured NCDs offer higher returns at increased risk levels.

Investment Rules in India

As per RBI’s regulations, NRI investment in NCDs is subject to certain conditions:

  • The NCDs should be offered by the issuing company through a public offer.
  • The interest rates on NCDs are capped at a maximum of 3% above the prime lending rate of the State Bank of India.
  • NCDs cannot be redeemed before three years from the date of investment.
  • The issuing company should not be engaged in certain sectors like agriculture and real estate​​.

Investment Procedure for NRIs

NRIs can invest in NCDs through remittances from abroad or using their NRE/FCNR accounts. It's crucial to provide a statement of receipt of remittances and issuance of NCDs to the RBI within 30 days of investment. The investment can be on a repatriation basis, where the holding of an NRI investor for each series of NCDs should not exceed the specified limit​​​​.

Risks and Considerations

Before investing in NCDs, NRIs should carefully assess the risks and benefits. It's advisable to consider the credit rating and financial health of the issuing company. Since NCDs are debt instruments, they are subject to market risks, interest rate fluctuations, and credit risks.

Conclusion

NCDs offer a viable investment option for NRIs seeking fixed-income avenues in India. With their blend of security and potential for higher returns, NCDs can be an attractive addition to an NRI’s investment portfolio. However, understanding the regulatory environment, tax implications, and associated risks is crucial for making informed investment decisions.

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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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