In a move geared towards addressing India’s ballooning current account deficit and depreciation of the Indian Rupee in international markets, the government has recently attempted to encourage low-cost foreign borrowings by Indian companies. The Central Board of Direct Taxes (“CBDT”) in its recent Press Release on 17 September 2018 (“Press Release”) has extended certain exemptions to Track III External Commercial Borrowings, popularly known as “Masala Bonds”.

What are Masala bonds?

In essence, Masala Bonds are rupee-denominated bonds offered by Indian companies in overseas markets. Unlike dollar-denominated bonds or bonds denominated in the local currency of issue wherein all currency fluctuation risks are assumed by the bond issuer, in the case of Masala Bonds, all currency fluctuation risks are transferred to the investors buying these bonds.

Unfortunately, Masala Bonds didn’t quite take off after they were first introduced in 2014. The reasons for this are twofold: first, the high interest rates on these instruments rendered them unattractive for Indian companies, who could raise their funding requirements in the Indian market by paying much lesser interest. The second reason was on account of regulatory oversight by the Reserve Bank of India (“RBI”), which through its circular dated June 7, 2017 introduced the requirement of obtaining prior RBI permission before issue of any Masala Bonds in international markets.

On account of the above reasons, only a handful of Indian companies till date have successfully issued Masala Bonds in international markets.

Press Release: Incentivising issue of Masala Bonds

In the current backdrop of rising crude prices and weakening of the Indian Rupee globally, it was felt that incentivising Masala Bonds may prove helpful in increasing India’s foreign exchange reserves. Consequently, the Press Release has come out, having the effect of exempting any interest payable to non-residents (including foreign companies) upon Masala Bonds from being taxed in India. This exemption shall be in place for Masala Bonds issued between September 17, 2018 and March 31, 2019.

Further, any capital gains made by non-resident investors between the date of issue of the Masala Bond and the date of its redemption, which is attributable to the appreciation of the Indian Rupee against the foreign currency in which the investment is made, shall be exempted from capital gains tax.

The exemption envisaged by the Press release will replace Section 194 LC of the Income Tax Act 1961, according to which interest payments to non-residents in respect of Masala Bonds were liable to a concessional rate of tax of 5% until 1 July 2020.


We feel that the changes brought about by the Press Release are a positive move for industry, reducing the overall tax outgo for investments routed through Masala Bonds and improving access for Indian companies to cheaper foreign borrowings. If successful, this measure could also have significant macroeconomic benefits by way of increasing capital inflows, decreasing currency hedging costs and stemming the depreciation of the Indian Rupee.

That said, merely reducing tax outgo on Masala Bonds may not be sufficient to significantly affect India’s current account deficit. There still exist significant regulatory hurdles for companies making issues of Masala Bonds, and foreign investors may not be willing to assume any currency risk in the current macroeconomic backdrop, thus rendering Masala Bonds unattractive. Further, the exemption is valid only for Masala Bonds issued until the end of this financial year 2018-19, which may not be sufficient time for significant foreign exchange to flow into India.

The Press Release is yet to be notified through legislative amendments to the Income Tax Act, 1961. Until the time it is notified, the exact form and manner this exemption may take remains to be seen. We hope appropriate incentives are provided by the government to make Masala Bonds an attractive mode of fundraising.

This post has been written by Viraj Joshi, an Associate in the Delhi office of GameChanger Law Advisors. Please feel to reach out to Viraj at

Image credits: YV Reddy (Wikimedia Commons)