NRI Investment in NCD – Eligibility, Application and Taxation

NRIs who are looking for a secure, long-term investment can invest in non-convertible debentures (NCDs). Debentures offer fixed returns, good liquidity at low risk and are ideal for individuals looking beyond stocks and NRI mutual funds. Not only residents, but non-residents and persons of Indian Origin can also benefit from non-convertible debentures. Here is everything you need to know about NRI investment in NCD, eligibility and tax implications. 

NRI Investment in NCD - Eligibility, Application and Taxation
NRI Investment in NCD

What is NCD?

A non-convertible debenture is a fixed deposit issued by public companies in India to raise funds without diluting their equity. NCDs provide a fixed rate of interest for a fixed period. Debenture is a long-term loan and can’t be converted into shares. NCDs are available in two forms – secured and unsecured NCDs. Secured NCDs are supported by the assets of the issuing company. On the other hand, unsecured NCDs are not secured by assets and therefore riskier when compared to secured NCDs, but offer higher returns than secured NCDs.     

NRI investment in NCD

The Reserve Bank of India allows NRI and PIOs to invest in NCDs in India. However, there are specific rules set by Foreign Exchange Management Act (FEMA) for NRI investment in India. NRI investment in NCD is on repatriable as well as non-repatriable basis if the rules of the issuing company allows them. It is rare that a company allows an NRI to invest in a public issue NCD. 

Under the eligibility section of the RHP, application from individuals and entities mentioned below are liable to be rejected:

Foreign nationals, including NRIs who are:

(i) Based in the USA, and or

(ii) Settled in the USA, and/ or

(iii) Residents/ Nationals of the USA, and/ or

(iv) Subject to any taxation laws of the USA 

NRI NCD investment rules in India

NRI investment in NCDs in India is subject to certain rules and regulations set by the RBI’s regulations. A company established in India can raise funds from NRI and PIO investors through an investment in NCD subject to the following conditions:

  • The issuing company offers NCDs by a public offer.
  • The interest rates on NCDs can be a maximum of 3% above the prime lending rate of the SBI.
  • You can’t redeem NCDs before 3 years from the date of investment.
  • The issuing company shall not engage in agriculture, plantation, real estate, chit funds and transferable development rights (TDRs). 
  • NRIs can invest through remittance from abroad or using their NRE/ FCNR account.
  • The NRI needs to provide a statement of receipt of remittance and receipt of issue of NCDs to the RBI within 30 days from the date of investment.
  • For investment on a repatriation basis, the holding of an NRI investor for each series of NCDs should not be more than specified limit for the issue of convertible debentures and equity shares for FDI. 

Usually NRIs are not allowed to invest in NCDs in India. Hence you must check the terms and conditions and the documents carefully to ensure your eligibility before you apply. 

NRI NCD tax

NRIs need to pay TDS (Tax Deducted at Source) on the interest earned on NCDs. Since NRIs are allowed to redeem their investment in NCDs only after 3 years, any income earned by the sale of NCDs will be subject to LTCG (Long-term Capital Gains) tax at the rate of 20%. 

Important points about NCD investment by NRIs

  • Not all companies allow NRIs to invest in NCDs. Please check the RHP of NCD to know if you are eligible to invest in NCDs.
  • NRIs can invest in NCDs on repatriation as well as non-repatriation basis.
  • NCDS can’t be redeemed before 3 years from the date of investment. 
  • NRIs are required to furnish a statement of receipt of remittances and issuance of NCDs to the Reserve Bank of India within 30 days of investment.
  • Interest earned from the investment in NCDs will be subject to LTCG tax at 20%. 

Living away from India, it is not easy for NRIs to open a NRI Trading account or Demat account and make the right decision about investment in India. At SBNRI, we understand that there are many obstacles faced by NRIs while investing in India. You can download SBNRI App to connect with our experts and get end-to-end assistance related to an NRI investment.

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