“NRI investors can freely transfer the bonds of IDFs. This lock-in period waiver will make investments in bonds issued by IDFs more attractive for foreign investors.
“If an NRI transfers rupee-denominated bonds of an IDF to another non-resident outside India, such transfer is not regarded as transfer for the purpose of capital gain, and no capital gain tax is charged on such transfer,” said Sajith Kumar, chief executive officer of IBMC International, Dubai-based financial services company.
Many NRIs have made investments in IDFs attracted by guaranteed returns and income tax exemptions.
India’s taxation authority the Central Board of Direct Taxes (CBDT) had amended the tax laws to provide exemption from income tax to IDFs in order to accelerate the flow of long-term debt in infrastructure projects.
Interest received by NRIs and foreign companies from their investments in IDFs used to be charged 5% income tax. The infrastructure bonds offer a decent rate of return and tax benefits.
The maturity of these bonds is often between 10 and 15 years with an option to buy-back after a lock-in period. Tax-free bonds public issue is open for NRIs to subscribe on both repatriable and non-repatriable basis.
The earlier stipulation was that the investment made by an NRI in infrastructure bonds should be subject to a lock-in period of three years except where transfer is made to another non-resident. However, NRIs were allowed to trade among themselves within the lock-in period.
Effective investment vehicle
The decision to remove the lock-in period condition is aimed at further boosting foreign investment in the infrastructure sector as IDFs are investment vehicles to accelerate the flow of long-term debt to the sector. This will also result in increased funding in the infrastructure sector.
It was also stipulated that IDFs set up as non-banking financial companies (NBFCs) may invest in debt securities of only public private partnership (PPP) infrastructure projects which have a buyout guarantee and have completed at least one year of commercial operations.
IDFs set up as mutual funds would invest minimum of 90% of its funds in debt securities of infrastructure companies or special vehicles across all infrastructure sectors, project stages and project types.
Betting on investment flow
India, betting on higher investment flow to the infrastructure sector to prop up the faltering economic growth, has set out a plan to invest INR100trn ($1.4trn; £1.13trn; €1.28trn) in the sector by 2024-25. A task force has been set up to identify infrastructure projects for the investment.
A recent media report said that the government can look at issuing infrastructure bonds via a special purpose vehicle, which could mop up over INR 950bn ($13.37bn; £10.74bn; €12.16bn).
NRIs can expect a host of such infrastructure bond issues, offering attractive returns on long-term investments and tax breaks.