Sovereign Green Bonds: Towards a Greener Future

India has set an ambitious target of installing projects of 500 GW of solar and other renewable energy capacities by 2030. Green bonds are one such financial tool to meet the emerging clean energy market and help in achieving such goals.

What are Sovereign Green Bonds?

Sovereign green bonds are bonds issued by the government to fund green projects, such as renewable energy, climate change adoption, green buildings, etc., and to help reduce the country’s carbon emissions. The idea was first discussed by Finance Minister Nirmala Sitharaman in the Budget 2022 as a part of overall market borrowing with the aim to provide a steady source of funding for green infrastructure projects and to increase private investment in these projects.

Simply stated, green bonds are nothing but just like any other Government Bonds except for the goal of using the funds. It is a fixed-income financial investment for raising capital through the debt market to meet climatic goals.

Note: The Reserve Bank of India (RBI) will issue Sovereign Green Bonds (SGrBs) worth Rs 16,000 crore as its first initiative. In the current financial year, these would be issued in two installments worth a total of Rs 8,000 crore each.
On January 25, and February 9 of 2023, the apex bank will issue Rs 4,000 crore each of sovereign green bonds with terms of five and ten years.

How beneficial it is for investors?

  • For investors, green sovereign bonds can offer a reliable source of income and may benefit by diversifying their investment portfolio and reducing their risk exposure.
  • By investing in Sovereign Green Bonds, investors are supporting sustainable development initiatives. This can help create a more sustainable future for generations to come.
  • It offers investment in securities that are backed by the government. This means that investors can enjoy the same low risk that they would with other forms of government bonds.
  • Sovereign bonds are highly liquid, meaning they can be easily sold in the secondary market. This provides investors with the flexibility to exit their investments whenever they wish.

Here’s a document that explains more about Framework for Sovereign Green Bonds.

The tax rules implied on green bonds are similar to regular government bonds, it is unlikely to get any tax incentives or relief to attract buyers to buy sovereign green bonds.

  • Interest on green bonds would be reported under Income from other sources (IFOS) and taxable at slab rates.
  • And If you sell these bonds in the secondary market, the income will be taxable as Capital gains, depending on the period of holding.
    • If the debt fund is held for more than 36 months, would be considered as LTCG (long-term capital gain), at a rate of 20% with indexation benefit.
    • And if you sell these debt funds within the period of 36 months then it is taxable under STCG (short-term capital gains).
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