The government has turned down a request from non-resident Indians to allow them to subscribe to the 8 per cent tax saving bonds.

Senior government officials said given the extent of the government subsidy towards the paper, there was no justification for allowing NRIs to tap the source.

They said while the demand had come in from several sources, they had not been able to offer any substantial reason for allowing them to subscribe to the bonds.

The finance ministry feels that since NRIs are a high net worth group, there is no justification for the government to offer such a subsidised product to them. The bonds impose high operating costs on the government, whose burden would be aggravated by adding the NRIs' investment to it.

In January this year, the government opened up and broadened several investment avenues in the country for NRIs, including liberal norms for conversion of American Depository Receipts and Global Depository Receipts into rupees.

The 8 per cent bond is the reworked version of the Government of India Relief Bonds, popularly known as the RBI Relief Bonds. The rate of interest on these bonds has been reduced gradually and was pegged at 8 per cent in the Budget for 2002-03.

Because of its tax-free status the effective yield on the bond works out to 11 per cent. But to ensure that high net worth individuals and companies did not misuse it, the government passed a notification in 2002 barring investment above Rs 200,000 in these five-year bonds.

Prior to this, the bonds were being used by industry to park surplus cash. Collections under the bond peaked at Rs 14,000 crore (Rs 140 billion) in 2001-02 because the Centre slashed interest rates on other small savings instruments like the Public Provident Fund and the Vikas Patras, making them unattractive.

In fact, the collection under these instruments went in favour of the Relief Bond initially. The finance ministry subsequently placed a cap of Rs 200,000 on the contribution by individuals.

However, the bond still remains the highest yielding bond offered by the government because of the tax shield. The ceiling of Rs 200,000 is meant to give small investors an opportunity to get tax relief on their investments.

The Centre has also introduced a 7 per cent tax free bond, 2002. However, these bonds are not tradeable in the secondary market and cannot be used as hypothecation or for any other purpose.