DBS faces I-T query over 2019 masala bond investments
Mumbai, Oct 17, 2025
Synopsis
Indian tax officials are scrutinizing DBS Bank's 2019 Masala Bond investments. The Income Tax department seeks confirmation on beneficial ownership and interest received. This probe follows a period of tax exemption for Masala Bond interest. The investigation aims to ensure compliance with investment regulations and tax benefits. Details on bond issuance and RBI filings are being sought.
'Masala Bond' investments by the Singapore bank DBS in 2019 has come under the lens of India's tax authorities.
Masala bonds, which later lost flavour among foreign investors, were denominated in rupees but issued outside India.
The Income Tax (I-T) department is believed to have asked a few bond issuers to confirm whether DBS was the "beneficial owner" of the bonds or received interest earnings from the investment on behalf of any other entity, persons familiar with the matter told ET.
Between September 2018 and end-March 2019, interest on Masala investors were exempt from tax. It was a move by the government to boost infrastructure funding without exposing the borrower to risks from foreign exchange fluctuations.
If an offshore financial institution held the bonds on behalf of its clients, then the interest received from the securities had to be passed on to the ultimate beneficial owners of the bonds.
The list of eligible non-resident investors for masala bonds included foreign pension funds, sovereign wealth funds, mutual funds, foreign banks and insurance companies, besides wealthy individuals and multilateral institutions like the ADB and IFC. Such investors had to be residents of any country that was a member of the Financial Action Task Force and whose securities market regulator was a member of the International Organization of Securities Commissions.
A foreign investor which is registered with the Securities & Exchange Board of India (Sebi) as a foreign portfolio investor (FPI) would satisfy almost all the conditions that eligible investors would meet. However, since masala - though rupee-denominated and issued by Indian companies - are issued overseas, non-FPI overseas investors could also invest in such papers. In this context, the I-T department has enquired whether DBS Singapore was a registered FPI at the investment.
DBS India, which was the facilitator to the particular issue and a branch of DBS Singapore in 2019, did not respond to queries from ET.
If a foreign entity which is qualified to invest in masala bonds pools in money from its wealth management clients who are not eligible to buy the bonds, it could draw the attention of the tax office. Also, resident investors betting on overseas securities under the liberalised remittance scheme (LRS) are not permitted to invest in masala bonds. LRS allows a resident Indian to invest upto $250,000 a year in overseas assets and securities, but not in securities issued by companies in India.
The issuer in question has been further asked by the I-T office whether the interest rate offered on the bonds was within the approved ceiling. It has also sought the loan registration number obtained from the Reserve Bank of India (RBI) for the transaction, copies of all mandatory filings made with RBI for drawdown of funds and for each subsequent outward remittance of interest and principal.
If some of the conditions were not met, tax officials can question the tax benefit extended to investors. After March 2019, the withholding tax --- the money that an issuer deducts before remitting the interest amount to non-resident investors --- as fixed at 5%.
Though the interest in masala bonds waned for multiple reasons, the withholding tax was significantly lower than the tax paid by other foreign investors on Indian debt papers. It was 20% for non-resident investors from countries having no tax treaty with India; 15% and 7.5% from treaty jurisdictions like Singapore and Mauritius, respectively, and 10% for investors based in the IFSC GIFT City.
[The Economic Times]
