Budget 2026: Govt May Provide Tax Breaks For Investing In Green Bonds; Will It Generate Demand

• Budget 2026 may give tax breaks to investors for green bonds

• Tax breaks may help raise demand for green bonds after tepid investor interest

The government is mulling tax rebates for investing in green bonds to push investor demand, a report by Mint said. Investor demand in sovereign green bonds (SGrBs) has been waning, and regulators and the government are thinking of new ways to bring in investment demand into this bond segment.

India's sovereign green bonds have shown limited interest and irregular yield spreads, despite the fact that markets often expect a "greenium," in which green bonds have somewhat lower yields than conventional ones.

Typically, for companies and governments raising money through green bonds, it also bears additional costs. Entities are required to go through additional checks and declarations to separate the proceeds from green bond bonds from other regular bonds. Due to this, entities desire a premium, called ‘greenium’, from investors. A greenium of 3–8 basis points over conventional bonds is achieved in many developed markets, while in India, this has only been 2-3 bps.

However, for investors, the only incentive to invest in green bonds is to invest in the long-term capital development of the economy, particularly in reducing energy dependence and in managing climate risk. Bonds with lower yields compared to other bonds have led to subdued interest in these bonds from investors.

“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,” Rishi Shah, partner and economic advisory services leader at Grant Thornton Bharat, told the paper.

Since some investors are not willing to pay a greenium for green bonds, it has led to the cancellation of bond raises through SGrBs in the past. When the Reserve Bank of India (RBI) issues green bonds on behalf of the government, public sector banks, insurance firms, pension funds, retail investors, and both local and foreign institutional investors are among the top buyers.

For India's sovereign green bond program, this fiscal year has been the most challenging yet. According to RBI data, as of January 2025, only roughly Rs. 16,697.39 crore of the Rs. 25,342 crore allocated for FY26 has been raised through green bonds.

Market participants and experts said that a tax break could help boost demand for green bonds.  However, it was also critical to improve the disclosure and governance standards on green projects to improve liquidity in green bonds. Project selection and outcome reporting, which global ESG capital increasingly prioritizes over marginal yield differentials, is also important, Shah told the paper.

“Recent success of IREDA bonds in receiving Section 54EC tax-exempt status demonstrates government commitment to provide tax incentives for green finance. Last time when IREDA issued tax-free bond in 2016, it was oversubscribed five times, so it's expected that tax breaks would kindle investor interest,” Abhishek Kumar, a Securities and Exchange Board of India-registered investment advisor (Sebi-RIA), said. “But a lot would depend on product design, as lower yield advantage of 2 to 3 basis points for domestic issuance compared to 7 to 8 basis points for global issuance could fail to attract investors.”

Additionally, the tepid demand from institutional investors in green bonds also stems from the fact that there is no mandate for companies to invest in green bonds, market participants said.