Taxability of the Rupee Denominated Bonds under Indian Law

lawzmag.comRupee denominated bonds (RDBs) or Masala bonds these days are becoming more enticing, thereby attracting both the investors and issuers. With these bonds, India also stands at a profitable position. In normal circumstances, Indian corporate issues debt instruments to raise money from the Indian investors. In contrast to other debt instruments, masala bonds are innovative type of bonds, which are linked to rupee but  issued to overseas investors. Indian government has introduced masala bonds so as to protect the investors from the currency risks. Housing Development Financing Corporation (HDFC) was the first Indian company which raised Rs.5000 Crores by issuing masala bonds. The Reserve Bank of India (RBI) issued a circular authorizing  the issuance of masala bonds overseas on September 29, 2015. International Finance Corporation(IFC), which is the private sector investment arm of the World Bank, issued and listed Masala Bonds in London Stock Exchange(LSE), to boost infrastructure projects in India.


Individual investors invest in different types of investment avenues with the intention of savings only. They lack awareness of wealth maximization.  For maximizing their wealth, it is necessary to invest in those investment avenues which would give greater returns in the longer period of time. Masala Bonds being the appropriate tool will help them in maximizing profits. Masala Bonds are creating a buzz in the Indian as well as the foreign markets. Seeing the success of HDFC, YES Bank and Indian railways have geared up and so as to make their entry in the overseas market. Prior to these Rupee Denominated Bonds/Masala Bonds, the External commercial borrowing (ECBs) was the main source of corporate houses to raise money from the foreign market. ECB means:

Any money that has been borrowed from foreign sources for financing the commercial activities in India is called External Commercial Borrowings. The Government of India permits ECBs as a source of finance for Indian Corporates for expansion of existing capacity as well as for fresh investment. The government has permitted the use of ECB’s as an additional source for of financing for expanding the existing capacity and for fresh investments. ECBs can be gotten to under the programmed and endorsement courses. The automatic course covers the borrowings for infrastructure, land and some other special service sectors. While the masala bonds issues bonds in overseas markets and the principal reimbursement and interest payment are segmented in rupees, these bonds are issued in rupee terms and at the time of maturity it will be paid in dollar terms leaving the entire risk of currency to the investors.

In November, 2014, the International Finance Corporation (IFC) issued the first masala bond in London in order to attract foreign investments in India. The reason behind the name ‘masala’ bond is that masala refers to the spiciness and culture of India. The idea was quite similar to the Chinese Dim-Sum Bonds, which are Yuan- denominated bonds and are named after a popular dish in Hong Kong. Another example is the Japanese Samurai Bonds which is a Yen denominated bond named after its country’s warrior. The purpose of introducing masala  bonds was to give the opportunity to the foreign investors to get experience of the Indian assets from their locations. But, one thing which is to be kept in mind is that they are attached to the currency risks or exchange rate risks since the settlement will be done in US dollars.

The reason behind the name ‘masala’ bond is that masala refers to the spiciness and culture of India


Section 194 LC of the Income Tax Act, 1961 says that in the event of any income by way of interest is payable to non- resident then the person responsible for making the payment is required to withhold income tax at the rate of 5%. Specific exemption is granted by the legislature with regards to the taxation of the masala bonds. Investors are showing more and more interest in investments in offshore rupee denominated bonds issued by Indian companies. Masala Bond being a rupee denominated bond, it would fall under the ambit of section 194 LD (Income by way of interest on certain bonds and government securities) of the Income Tax Act. It therefore implies that only such category of investors which would cover foreign portfolio investors would be covered for exempted rate of 5%.

On 29th September 2015, RBI provided a precise framework enabling Indian companies to issue rupee denominated bonds outside India, but the taxation of such bonds has been a matter of discussion. Presently, there are no express provisions dealing with taxation of interest on the masala bonds. Foreign investors have, expressed their concerns relating to the absence of any specific provision dealing with the taxation of offshore rupee denominated bonds. The Central Bureau of Direct Tax via press release dated 29/10/2015 clarified that withholding tax at the rate of 5% would be applicable in the similar manner as for offshore dollar denominated bonds.

press release and subsequent amendment of the law put to rest the issue of taxation of capital gains on the masala bonds arising in case of appreciation of the rupee between the date of issue and date of  redemption against the foreign currency in which investment is made by specifically exempting such gains. With respect to transfer of masala bonds among non-residents also, the government has received representations seeking certain exemptions.



•As the interest rates in developed countries are lower in comparison with Indian rates, so the corporate houses can borrow at lower interest rates

•Indian entities being the issuer do not have to bear the currency risks. This means that if there are any fluctuations in the currencies then the risk has to be totally bearded by the offshore investors.

• It helps the Indian Corporates to diversify their bond portfolio.


•An investor gets benefit from the masala bonds, if the rupee appreciates at the time of maturity.

•Rupee Denominated Bonds are building interest among the investors who are at present unwilling to invest in offshore bonds.

•In order to attract and give more benefits to foreign investors, the Ministry of Finance cut the withholding tax on interest proceeds of bonds from 20% to 5%, also the capital gains from appreciation of rupee are exempted from tax.


Along with the merits associated with masala bonds, there are demerits too. There are risks involving rapid shifts in capital flows, financial candidates and the risk which the overseas market may portray liquidity away from the domestic market.


As per the guidelines issued by the RBI in September 2015, the money borrowed under the masala bonds can be used only for infrastructure funding purposes. In order to amass more and more funds so as to achieve the capital needs for the infrastructure projects, RBI allowed the banks to issue masala bonds in August 2016. The overall guidelines underlying for rupee denominated bonds will be similar to that for External Commercial Borrowings (ECBs)

Issuers of RDBs:

Any corporate formed under the specific act of Parliament is eligible to issue masala bonds overseas. According to the September 2015 regulation Infrastructure Investment Trusts (InvITs) and real Estate Investment Trusts (REITs) which comes under SEBIs jurisdiction are also eligible.

Interests payment and maximum amount:

The payment of interest which is the coupon payment should not be more than 500 basis point. It means that at the time of maturity, it should not exceed the yield of Indian Government’s security. An eligible issuer can issue maximum of INR 50 billion or its equivalent through masala bonds under automatic route of the external commercial borrowings (ECBs). This limit might be more than the permitted amount under automatic route of ECB.

Corporate issuers and maturity period:

Indian corporates, who are entitled to issue the External Commercial Borrowings (ECBs), are entitled to issue offshore rupee denominated bonds. The RDBs borrowing procedure follows the same guidelines which the corporates follows to issue ECBs.The average maturity period is 3 years.


The steps taken by the RBI to enable issuance of RDBs can be fruitful to the economy as well as it can provide a major boost to the Indian economy. One of the key takeaways of the Circular is that the RBI has chosen to be very minimalistic in its stipulations so as to truly achieve the liberalization which is intended. On expanding the scope of borrowers, limiting the prohibited end users and enabling the all in cost to be determined in accordance with the market scenarios are the correct steps taken by the RBI.

The issuance of masala bonds by the RBI could provide a major boost to the Indian economy. The recent opportunity for Indian banks to collect foreign currency through RDBs is also a good step towards the growth. Dependence on the masala bonds for foreign investments is definitely a good step but total reliance on such bonds will lead to negative exposure and will significantly affect the investments of India.

Ankit Kumar

5 thoughts on “Taxability of the Rupee Denominated Bonds under Indian Law”

  1. bhumikamudgil says:


  2. wassim says:

    nice article

  3. ekta says:

    gud one

  4. anurag says:

    well written

  5. om says:

    Thanks for sharing

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