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

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. “This is because the ultimate goal of raising funds through green bonds is to lend to climate-focused projects at lower interest rates."

On Wednesday, the 10-year government bond was trading at 6.643%, while the 30-year bond was at 7.377%, according to Bloomberg data.

However, Sabnavis feels tax breaks could make a difference, citing the issuance of tax-free bonds by public sector undertakings as an example. “When tax free bonds by PSUs were introduced, they were a major hit. Similar relief for buyers may be looked at for green bonds," he said.

Queries emailed to the ministries of new and renewable energy, and finance remained unanswered till press time.

Sliding subscriptions

Green bonds are issued by the Reserve Bank of India (RBI) on behalf of the government. Top buyers include domestic and international institutional investors, public sector banks, insurance companies, pension funds and retail investors.

The current fiscal year has been the toughest one so far for India’s sovereign green bond programme. Of the ₹25,342 crore earmarked for FY26, only about ₹16,697.39 crore had been raised via green bonds as of January 2025, according to RBI data.

This has prompted the Centre to change its target for FY26. In the first half of the fiscal year, only ₹5,000 crore worth sovereign green bonds was subscribed of the ₹10,000 crore issued. The bonds also cleared at yields higher than comparable 10-year and 30-year government bonds, reflecting tepid investor demand.

The government now plans to raise another ₹10,000 crore through green bonds in the second half of the year, with two 30-year issuances of ₹5,000 crore each.

In FY25, too, green bond subscriptions at ₹25,297.89 crore fell short of the target of ₹32,060.86 crore. However, the subscriptions were still higher than the previous year’s ₹20,785.60 crore.

Sovereign green bonds were introduced in January 2023. The Reserve Bank of India has issued about ₹58,000 crore in such bonds till FY25.

Changes needed

Rishi Shah, partner and economic advisory services leader at Grant Thornton Bharat, said the primary motivation behind sovereign green bonds may not be to extract a pricing premium, but to direct long-term capital toward investments that reduce structural vulnerabilities in the economy, particularly energy dependence, climate risk and transition costs.

“In India’s case, the relatively narrow greenium reflects the reality that sovereign risk is already efficiently priced and that the domestic bond market is still evolving, rather than a lack of investor interest. To deepen the market, policy should focus on scale, predictability and credibility. Larger and regular issuance at benchmark maturities would improve liquidity and allow green bonds to be absorbed into core portfolios. Equally critical is rigorous project selection and outcome reporting, which global ESG capital increasingly prioritizes over marginal yield differentials," he said.

Further, experts say that a credible sovereign green bond curve can also act as a benchmark and risk anchor for private green issuance, helping lower funding costs, improve disclosure standards and crowd in private capital for India’s energy transition.

“As the bond market matures and institutional participation broadens, sovereign green bonds can play a strategic role, financing the transition, catalyzing private investment and lowering long-term macro risks. The economic payoff from this process is likely to far exceed any near-term pricing advantage," Shah added.

Rough patch for India’s green transition

The emphasis on raising funds through sovereign green bonds comes on the back of the massive requirement of around $1.5 trillion for India’s energy transition roadmap across sectors to combat climate change.

Mint earlier reported that the government is looking at ways to mobilize over $1 trillion in green finance to boost investments into clean energy as the 2030 deadline for 500GW of renewable capacity nears. India's total non-fossil capacity currently stands at 266.78GW.

This comes at a time when India’s green energy space is going through a tough patch; with several states including Uttar Pradesh, Bihar, Assam and West Bengal signing coal-fuelled power purchase agreements (PPA) at a higher tariff as compared to that from renewable energy projects.

Also, 43GW green power capacity involving ₹2.1 trillion proposed investment doesn't have PPAs and power supply agreements (PSAs) in place as reported by Mint earlier. Also, the interest in new coal-fuelled plants comes in the backdrop of curtailment of green power generation in Rajasthan and Gujarat, two of the largest renewable power generating states in the country.

To be sure, the government takes the final call on budget allocations closer to the budget announcement on 1 February, keeping in mind revenue and economic growth forecasts as well as savings in revenue spending.