India Plans Tax Incentives to Revive Green Bond Market
The Indian government is actively exploring new strategies to revitalize its sovereign green bond program. Investor enthusiasm for these climate-focused financial instruments has waned significantly over the past two years. This persistent decline is pushing authorities toward potential tax rebates for buyers in the upcoming Union budget for fiscal year 2027.
Subdued Demand Drives Policy Shift
Officials familiar with internal government discussions confirm the consideration of tax incentives. "Investor interest in sovereign green bonds has been subdued," one official stated anonymously. "The interest rates of these bonds compared to other bonds are largely similar, which makes green bonds less attractive. Therefore, there is a consideration to incentivize buyers through tax rebates and boost liquidity for green projects."
Market expectations typically include a "greenium"—a slight yield discount for green bonds compared to conventional ones. However, India's sovereign green bonds have shown minimal and inconsistent yield differences. Many developed markets achieve a greenium of 3-8 basis points, but in India, this has been limited to just 2-3 basis points.
Madan Sabnavis, chief economist at Bank of Baroda, explained the dynamic. "Usually there is a tendency for green bond yields to be lower than normal bonds, leading to lower buyer interest," he said. "The 10-year green bonds would be about 10-15 basis points lower than comparable conventional government bonds. This is because the ultimate goal is to lend to climate-focused projects at lower interest rates."
Sabnavis believes tax breaks could make a substantial difference. He cited the successful introduction of tax-free bonds by public sector undertakings as a precedent. "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 added.
Challenging Fiscal Performance
The current fiscal year, FY26, has proven particularly difficult for India's sovereign green bond program. The Reserve Bank of India issues these bonds on behalf of the government. Top buyers include:
- Domestic and international institutional investors
- Public sector banks
- Insurance companies
- Pension funds
- Retail investors
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 shortfall prompted the Centre to adjust its target. In the first half of the fiscal year, only ₹5,000 crore worth of sovereign green bonds were subscribed out of ₹10,000 crore issued. These bonds cleared at yields higher than comparable 10-year and 30-year government bonds, reflecting tepid 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, green bond subscriptions at ₹25,297.89 crore also fell short of the ₹32,060.86 crore target, though they were 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 approximately ₹58,000 crore in such bonds up to FY25.
Expert Calls for Structural Improvements
Rishi Shah, partner and economic advisory services leader at Grant Thornton Bharat, offered a broader perspective. He suggested 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.
"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," Shah said. "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."
He emphasized that rigorous project selection and outcome reporting are equally critical, as global ESG capital increasingly prioritizes these factors over marginal yield differentials. Experts also note that a credible sovereign green bond curve can act as a benchmark for private green issuance, helping lower funding costs and improve disclosure standards.
"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," Shah added. "The economic payoff from this process is likely to far exceed any near-term pricing advantage."
Broader Context of India's Green Transition
The push to raise funds through sovereign green bonds aligns with India's massive financial requirements for energy transition. The country needs around $1.5 trillion across sectors to combat climate change. Reports indicate the government is looking to mobilize over $1 trillion in green finance to boost investments into clean energy as the 2030 deadline for 500GW of renewable capacity approaches. India's total non-fossil capacity currently stands at 266.78GW.
This effort comes during a challenging period for India's green energy sector. Several states, including Uttar Pradesh, Bihar, Assam, and West Bengal, have signed coal-fuelled power purchase agreements at higher tariffs compared to renewable energy projects. Additionally, 43GW of green power capacity involving ₹2.1 trillion in proposed investment lacks power purchase agreements and power supply agreements.
The interest in new coal-fuelled plants emerges against the backdrop of curtailed green power generation in Rajasthan and Gujarat, two of India's largest renewable power-generating states. The government will make final decisions on budget allocations closer to the announcement on February 1, considering revenue, economic growth forecasts, and potential savings in revenue spending.
