Govt mulls tax breaks for green bonds in budget amid weak investor interest

Subscribe to enjoy similar stories. NEW DELHI : Investor interest in sovereign green bonds has been steadily declining over the past two years, forcing the central government to think up new ways to get them going.

Consequently, the upcoming Union budget for FY27 may offer tax rebates for green bond buyers to make the climate finance instrument more attractive, according to two officials aware of deliberations within the government. “The investor interest in sovereign green bonds has been subdued and the interest rates of these bonds compared to that of other bonds is also largely at a similar level, which makes green bonds less attractive," one of the officials cited above said on the condition of anonymity.

“Therefore, there is a consideration to incentivize buyers through tax rebates and boost liquidity for green projects." Although markets generally anticipate a “greenium"—where green bonds carry slightly lower yields than regular ones—India’s sovereign green bonds have shown minimal and inconsistent yield differences. Many developed markets achieve a greenium of 3-8 basis points (bps) over conventional bonds, but in India this has been limited to just 2-3 bps.

One basis point is a hundredth of a percentage point. “Usually there is a tendency in terms of green bonds for the yield to be lower than the normal bonds, leading to lower buyer interest—the 10-year green bonds would be about 10-15 basis points lower than (comparable conventional government bonds)," said Madan Sabnavis, chief economist of Bank of Baroda.