Finance ministry announces tax relief for rupee denominated bonds

New Delhi: The government on Thursday announced tax breaks on income from offshore bonds in a bid to encourage foreign investors to buy rupee-denominated bonds.

The finance ministry in a statement said that a lower withholding tax of 5% will be applicable on interest income accruing to non-resident investors of these bonds, similar to the treatment given to offshore dollar denominated bonds. Also, the capital gains from a possible appreciation of rupee between the date of issue and redemption against the foreign currency in which the investment is made would be exempted from capital gains tax.

The government, however, will bring in these legislative amendments only in the Finance Bill 2016.

Domestic investors, looking to raise these bond issuances, were hoping that the government would bring about these changes in the upcoming winter session so that they could proceed with the issuances in the next couple of months.

An increase of interest rates by the US Federal Reserve could reduce the investor appetite for these bonds and the institutions were hoping to hit the market before that.

Late Wednesday, the US Federal Reserve indicated that it may start increasing interest rates in December.

The Reserve Bank of India (RBI), last month, had issued detailed guidelines permitting Indian companies to sell rupee-denominated bonds outside India. The bonds will help these institutions raise cheaper funds from overseas markets, simultaneously shifting the burden of hedging against foreign currency fluctuations to the investors buying these bonds. However, institutions were waiting for the government to provide some tax relief to encourage investors to invest.

India Infrastructure Finance Co. Ltd, Indian Railway Finance Corp. Ltd and NTPC Ltd are among the companies laying the groundwork to issue rupee-denominated bonds in the next few months and were awaiting this tax relief from the government, Mint had reported on 26 October.