Taxability on Bonds for NRIs

Unless specified as ‘Tax-free’ bond, the gains made from the sale of a bond or the interest received from it are taxable under the Income Tax Act of India.  The interest amount received from the bonds held by an NRI is taxed according to the relevant tax status of the category ‘Income from Other Sources’. If the bonds are sold on the stock exchanges, either LTCG (Long Term Capital Gains) Tax or STCG (Short Term Capital Gains) Tax will be applicable depending on the duration for which the bond was held by the NRI.

Tax-free Bonds are a very popular investment option for NRI investors as they offer tax benefits and carry very low risk. Such bonds, usually issued by government enterprises have a long maturity period and pay a fixed interest rate or ‘coupon rate’. This rate is linked to the prevailing rate of government securities at the time of issue. The interest earned on these tax-free bonds is fully exempt from income tax.

However, if these bonds are sold by an NRI investor on the stock exchange, the gains made are subject to Capital Gains tax depending on the holding period. If the bonds are sold on the stock exchanges within 12 months of purchase, STCG tax is applicable which is equal to the tax rate of the investor. If it is sold after a holding period of more than 12 months, LTCG tax is applicable which is 10.3% of the gains made. For an NRI investor, the relevant tax applicable is deducted as TDS (Tax Deducted at Source) and the post-tax value is credited to the bank account specified.

The gains made from trading of all types of bonds on stock exchanges do not carry any indexation benefit. Before any investments by NRIs in Bonds, they should ask the questions below:

  1. Who is the issuer of the bond and what is the credit rating assigned to the issue?
  2. As an NRI, what benefit does subscribe to the bond offer, have over other investment alternatives?
  3. What is the taxability on the interest earned and capital gains earned, if any?
  4. Can the interest earned or the gains made be repatriated?
  5. What is the minimum tenure specified in the bond issue and is it worth investing in Bonds for that tenure?
  6. What is the purpose of investing in Bonds – is it for Capital appreciation or for Capital Protection or for steady returns?

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