Why This Matters to You as an NRI
India's defence sector has quietly become one of the fastest growing segments of the economy. If you have been watching Bharat Electronics, Hindustan Aeronautics, or any of the dozens of private defence companies listed on Indian exchanges, you already know the returns have been extraordinary. Now the government has laid out a clear roadmap through 2029 that makes this sector even more attractive for NRI capital.
The Defence Procurement Manual 2025 (effective immediately) and the Export Promotion Mission with a ₹25,060 crore outlay have created a structured ecosystem where private manufacturers—including those backed by NRI capital—can scale rapidly. The numbers tell the story: exports have grown 34 times in a decade, and the government is now pushing hard to reach ₹50,000 crore by 2029.
What makes 2025 special is the arrival of three major bilateral defence partnerships signed between October 2025 and February 2026. India signed the U.S.-India Major Defense Partnership Framework (October 31, 2025), the India-Israel Defence Cooperation MoU (November 4, 2025, formalized in the joint statement of February 26, 2026), and the Australia-India Defence Ministers' Dialogue agreement (October 9, 2025). These deals unlock technology transfer, co-production, and joint ventures in advanced systems like drones, jet engines, missiles, and radars. For NRI investors, this means reduced geopolitical risk, clearer export pathways, and higher valuations for defence stocks and private manufacturers.
Let us walk through what the government announced, what the numbers look like, and exactly how you can participate.
The Big Numbers: Production and Exports
According to the Ministry of Defence Annual Report for FY 2024-25 and the Defence Procurement Manual 2025, here is where things stand:
| Metric | FY 2024-25 Achievement | 2029 Target | |---|---|---| | Defence Production | Rs 1,50,590 crore (all time high) | Rs 3,00,000 crore | | Defence Exports | Rs 23,622 crore (all time high) | Rs 50,000 crore | | Countries Importing Indian Defence Products | Over 100 | Expanding further | | MSMEs Integrated into Defence Supply Chain | 16,000 | Growing via iDEX and EPM | | MoD Contracts Signed (FY 2024-25) | 193 contracts worth Rs 2,09,050 crore | Accelerating under DPM 2025 | | US-India Defence Cooperation Target (2025-2035) | Baseline | Co-production of jet engines, MQ-9B drones, advanced munitions | | India-Israel Defence Collaboration | Historical procurement in billions | Technology transfer in drones, missiles, radars, unmanned systems | | Light Combat Aircraft (LCA) Mk1A Contract | 97 aircraft ordered from HAL | Enhances indigenous fighter jet production |
To put the export growth in perspective, India exported less than Rs 1,000 crore worth of defence products in 2014. That figure has grown roughly 34 times in a decade. The government is now targeting a near doubling of exports in the next five years. The bilateral agreements signed in 2025 are expected to add another 12 to 15 percent annual growth to defence exports through co-production and technology localization.
What Is Driving This Growth
Defence Procurement Manual 2025 (DPM 2025)
Effective from 2025, the new DPM 2025 replaces earlier procurement guidelines and mandates a 25 percent indigenous content goal for government purchases (excluding defence armament imports from this calculation). This is a crucial distinction: the government is not counting imported weapons systems toward the indigenisation target, which means the focus is entirely on boosting domestic manufacturing of components, sub-systems, and finished goods.
The manual prioritizes the "Buy (Indian IDDM)" category—Indian Designed, Developed, and Manufactured products get first preference in government procurement. This creates a guaranteed domestic market for companies manufacturing in India. For NRIs, this means any investment in a private defence manufacturer that achieves IDDM status has a built-in government customer.
DPM 2025 also streamlines procurement timelines through digital monitoring and concurrent actions. The MoD signed 193 contracts worth Rs 2,09,050 crore in FY 2024-25 alone, and this pace is expected to accelerate under the new manual. Procurement follows the Defence Acquisition Procedure (DAP) 2020, which prioritizes local content and creates transparent bidding windows for private manufacturers.
Production Linked Incentive (PLI) Scheme for Defence
The PLI scheme for defence manufacturing has been operational since 2021 and now extends through 2029. It targets high value items like aerospace components, drones, avionics, and ammunition. Companies that meet production and export thresholds can draw from a PLI incentive pool of Rs 1,000 crore. The key requirement is localization: manufacturers must achieve 50 to 60 percent indigenization by 2025 to qualify for incentives.
The broader PLI framework across 14 sectors (including defence) carries a total outlay of Rs 1.91 lakh crore. For defence specifically, PLI disbursals are tied to production and sales milestones and are expected to flow from FY 2025 onwards for approved manufacturers.
Export Promotion Mission (EPM)
The government launched the EPM with an outlay of Rs 25,060 crore covering FY 2025-26 through FY 2030-31. This is a major new push. The mission operates through two arms called Niryat Protsahan (trade finance support) and Niryat Disha (market readiness and export facilitation), both designed to help MSMEs break into export markets. The 2025 target includes reaching $5 to $6 billion in defence exports, with the ultimate goal of Rs 50,000 crore by 2029.
For NRI backed entities, the EPM creates a structured pathway to export. First-time MSME exporters in defence items can access trade finance and market development support through these two sub-schemes.
iDEX (Innovations for Defence Excellence)
iDEX provides grants of up to Rs 1.5 crore for prototype development and facilitates technology transfer from DRDO to private manufacturers. Winners of iDEX challenges can receive up to 100 percent equity support for their startups. The DPM 2025 specifically highlights iDEX as a mechanism for linking innovators with private manufacturers, creating a pipeline of new technologies that can be scaled for both domestic and export markets.
The India-Israel Defence Cooperation MoU (November 4, 2025) and the U.S.-India Major Defense Partnership Framework (October 31, 2025) both emphasize technology transfer and joint R&D. This means iDEX winners working on drones, missiles, radars, and unmanned systems now have access to Israeli and American technology partnerships, dramatically shortening development cycles and improving export competitiveness.
Technology Development Fund (TDF) and Defence Industry-Academia Centres of Excellence (DIA-CoEs)
DRDO operates the TDF with a Rs 500 crore corpus specifically for deep tech development. This fund supports private companies working on cutting edge defence technologies. Additionally, the MoD has established 15 Defence Industry-Academia Centres of Excellence (DIA-CoEs) that link academic institutions, startups, and private manufacturers. These centres focus on areas like drones, avionics, and electronic warfare systems—exactly the high-value segments where NRI backed startups can gain traction.
For NRIs backing iDEX startups, the DIA-CoEs provide a bridge to both DRDO technology and academic expertise, reducing the time to market for new products. The bilateral agreements with Israel and the United States now add international research partnerships to this ecosystem.
Defence Industrial Corridors
Two dedicated defence corridors in Uttar Pradesh and Tamil Nadu provide infrastructure, land, and state level subsidies to manufacturers setting up production facilities. The DPM 2025 emphasizes these corridors as clustering hubs where private players can co-locate, share supply chains, and benefit from state-level tax incentives. NRIs can access these incentives through investments routed via NRE accounts.
New Bilateral Defence Agreements: What They Mean for NRI Investors
India-Israel Defence Cooperation MoU (November 4, 2025, Formalized February 26, 2026)
On February 26, 2026, India and Israel issued a joint statement welcoming the Memorandum of Understanding on Defence Cooperation signed on November 4, 2025. The agreement underscores significant growth in India-Israel defence cooperation and provides a roadmap for future collaboration across Government-to-Government (G2G), Business-to-Business (B2B), and People-to-People domains.
Key focus areas include technology transfer, co-production, and joint R&D in advanced defence technologies such as drones, missiles, radars, and unmanned systems. Israel is now India's fourth-largest defence supplier, with historical procurement worth billions. This agreement transforms that relationship from buyer-seller to co-producer and co-innovator.
The joint statement (February 26, 2026) highlights several new institutional mechanisms:
- India-Israel Centre of Excellence in Cybersecurity: A Letter of Intent was signed to establish this centre in India, building on the inaugural India-Israel Cyber Policy Dialogue held in March 2025. This centre will drive technology integration in cybersecurity, artificial intelligence, semiconductors, quantum computing, and biotechnology—sectors directly aligned with India's Viksit Bharat 2047 vision.
- Human Capacity Building and Joint Exercises: The roadmap includes regular joint tabletop exercises, human capacity building programs, and integration of Security by Design principles across defence platforms.
- Broader Technology Integration: Beyond defence, the partnership spans AI, cybersecurity, semiconductors, quantum computing, biotechnology, agriculture, water management, and space exploration. This diversification reduces geopolitical concentration risk for NRI investors.
The agreement also signals reduced geopolitical risk from over-reliance on Russia and France for defence supplies, which historically has created volatility in the sector. Diversification toward Israel and the United States reduces this tail risk and improves long-term valuations. For NRIs holding defence stocks or mutual funds tracking the Nifty Defence Index, this partnership strengthens the investment thesis.
Tax and Repatriation Considerations: NRIs should note that capital gains from defence stock investments qualify as Long-Term Capital Gains (LTCG) at 12.5 percent (post-2024 Budget) if held for more than two years. Dividend income is taxed at the applicable slab rate. Repatriation of profits is permitted under the Liberalised Remittance Scheme (LRS) up to $250,000 per financial year. DTAA benefits apply for US and Israeli NRIs, potentially reducing withholding tax on dividends to 5-15 percent depending on the treaty.
U.S.-India Major Defense Partnership Framework (October 31, 2025)
On October 31, 2025, U.S. Secretary of Defense Pete Hegseth and Indian Defence Minister Rajnath Singh signed the 2025 Framework for the U.S.-India Major Defense Partnership during the ASEAN Defense Ministers' Meeting-Plus in Kuala Lumpur. This framework supersedes the 2023 U.S.-India Roadmap for Defense Industrial Cooperation and is effective through 2035.
The framework deepens cooperation across land, sea, air, space, and cyberspace domains, emphasizing interoperability, strategic convergence, and conflict deterrence. Key priorities include co-production of jet engines, MQ-9B drones, and advanced munitions under Make in India, with Government-to-Government agreements for technology transfer and joint ventures.
For NRI investors, this bilateral deal directly enhances investment avenues in India's defence sector. Companies like L&T, Bharat Forge, and Tata Advanced Systems are positioned to benefit from U.S. technology integrations and co-production contracts. The framework aligns with 2025-2030 defence procurement plans worth approximately $130 billion, focusing on indigenization and reducing import dependency.
The U.S.-India partnership also improves supply chain resilience and creates new revenue streams for Indian manufacturers exporting to North America and allied nations. For NRI investors holding defence stocks or mutual funds tracking the Nifty Defence Index, this agreement signals sustained sector growth of 12 to 15 percent annually through 2035.
Investment Pathways: NRIs can participate through:
- Direct Equity: Buying defence stocks on BSE/NSE (subject to SEBI's 10 percent aggregate limit for FIIs/NRIs in defence PSUs).
- Mutual Funds and ETFs: Tracking the Nifty Defence Index or sector-specific defence funds.
- Private Placements: Investing in unlisted defence startups via iDEX or through venture capital funds focused on defence tech.
- FDI Route: Setting up or acquiring stakes in defence manufacturing companies (up to 49 percent automatic, 100 percent with government approval).
Australia-India Defence Ministers' Dialogue (October 9, 2025)
On October 9, 2025, Australia and India held their inaugural Defence Ministers' Dialogue, with Australia's Minister for Defence Richard Marles and India's Rajnath Singh committing to annual dialogues and expanded cooperation. Key signings include the Australia-India Implementing Arrangement on Mutual Submarine Rescue Support (effective immediately) and progress on the 2024 Air-to-Air Refuelling Arrangement.
The dialogue establishes Joint Staff Talks for exercises, operations, and interoperability. India will join Exercise Talisman Sabre (2025 and 2027), and Australia will participate in India's Tarang Shakti and Black Carillon exercises. The agreement also focuses on logistics via Mutual Logistics Support Arrangement and technology collaboration through a Joint Working Group on Defence Industry, Research, and Materiel, including Maintenance, Repair, and Overhaul (MRO) for Royal Australian Navy ships.
For NRI investors, the Australia partnership adds another layer of geopolitical diversification. Australian defence procurement and co-production opportunities create new export pathways for Indian manufacturers, indirectly boosting valuations of defence stocks and private companies involved in MRO and logistics services.
Investment Impact: What This Means for Your Portfolio
Stock Valuations and Sector Growth
The three bilateral agreements, combined with the DPM 2025 and EPM, create a multi-year tailwind for defence stocks. Historical precedent shows that defence sector stocks in India have delivered 18-25 percent annual returns during periods of strong government procurement and bilateral partnerships. The current environment—with ₹2,09,050 crore in contracts signed in FY 2024-25 alone and acceleration expected under DPM 2025—suggests similar or higher returns through 2029.
Key beneficiaries include:
- Hindustan Aeronautics Limited (HAL): The 97-aircraft LCA Mk1A contract (signed in 2025) directly boosts HAL's order book and production capacity. This contract alone is worth several thousand crores and will drive earnings growth through 2030.
- Bharat Electronics Limited (BEL): Positioned to benefit from radar, missile, and drone co-production with Israel and the US.
- L&T Defence: Co-production of jet engines and advanced munitions under the US partnership.
- Tata Advanced Systems: Aerospace and avionics manufacturing aligned with US technology transfer.
- Bharat Forge: Ammunition and munitions production under PLI and bilateral agreements.
NRI-Specific Tax and Compliance Considerations
Capital Gains Tax: Defence stock investments held for more than two years qualify for Long-Term Capital Gains (LTCG) taxation at 12.5 percent (post-2024 Budget). Short-term gains are taxed at your applicable slab rate (up to 42 percent for high earners).
Dividend Income: Dividends from defence stocks are taxed at your applicable slab rate. However, if you hold shares through an NRE account, dividend repatriation is permitted under the Liberalised Remittance Scheme (LRS).
FDI Limits: If investing directly in defence companies (not listed stocks), FDI is permitted up to 49 percent automatically and up to 100 percent with government approval. Ensure you file the necessary FDI declarations with the RBI.
SEBI Limits: FIIs and NRIs collectively cannot hold more than 10 percent of a defence PSU's equity. Check current holdings before investing in large positions.
DTAA Benefits: If you are a US or Israeli NRI, Double Taxation Avoidance Agreements (DTAA) may reduce withholding tax on dividends to 5-15 percent. Consult a tax advisor to claim treaty benefits.
Repatriation: You can repatriate profits up to $250,000 per financial year under the LRS without RBI approval. Beyond this, you need RBI's Liberalised Remittance Scheme approval.
Mutual Funds and ETFs
For NRIs seeking exposure without direct stock picking, consider:
- Nifty Defence Index Funds: Track the top defence companies in one basket.
- Sector-Specific Defence Mutual Funds: Actively managed funds focusing on defence and aerospace.
- International Defence ETFs: Some global ETFs track Indian defence companies alongside international peers.
Private Placements and Startup Investments
NRIs can invest in unlisted defence startups through:
- iDEX Winners: Startups winning iDEX challenges can receive up to 100 percent equity support. NRIs can invest in these startups via venture capital funds or direct equity (subject to FEMA regulations).
- Defence Venture Capital Funds: Several funds focus exclusively on defence tech startups. These offer higher growth potential but also higher risk.
- Private Equity: PE funds investing in defence manufacturing companies offer exposure to the sector with professional management.
Geopolitical Risk and Diversification
The three bilateral agreements significantly reduce geopolitical concentration risk. Historically, India's defence procurement relied heavily on Russia and France, creating vulnerability to sanctions, supply chain disruptions, and diplomatic tensions. The new partnerships with the US, Israel, and Australia diversify this risk.
However, NRI investors should remain aware of:
- Regional Tensions: India-Pakistan and India-China tensions can create short-term volatility in defence stocks. The Australia partnership and US alignment may escalate tensions with China, creating both opportunities and risks.
- Technology Transfer Delays: Co-production agreements often face delays due to regulatory approvals, technology security concerns, and bureaucratic processes. Build in a 2-3 year timeline before expecting full revenue impact.
- Export Restrictions: The US and Israel may impose restrictions on exporting co-produced defence items to certain countries, limiting India's export market. Monitor bilateral agreements for these clauses.
- Currency Risk: If you are investing from the US or Europe, INR depreciation can reduce rupee-denominated returns. Consider hedging strategies if you have large positions.
Action Items for NRI Investors
1. Review Your Current Holdings: If you hold defence stocks, assess whether your portfolio is aligned with the new bilateral partnerships and DPM 2025 priorities.
2. Monitor Q1 FY 2026 Results: Defence companies will report Q1 FY 2026 results (July-August 2025) reflecting early impacts of DPM 2025 and bilateral agreements. Use these results to inform investment decisions.
3. Check SEBI and RBI Limits: Verify that your defence stock holdings do not exceed SEBI's 10 percent FII/NRI limit or RBI's FDI caps.
4. Plan Tax Strategy: Consult a tax advisor to optimize your capital gains tax liability. Consider holding periods, DTAA benefits, and repatriation timing.
5. Diversify Across Segments: Don't concentrate all defence exposure in one stock. Spread across HAL, BEL, L&T Defence, Tata Advanced Systems, and Bharat Forge to reduce single-company risk.
6. Track Government Announcements: Follow PIB, MEA, and MoD announcements for new contracts, bilateral developments, and policy changes. These often precede stock price movements.
7. Consider Mutual Funds: If direct stock picking feels overwhelming, invest through Nifty Defence Index funds or sector-specific defence mutual funds for professional management and diversification.
8. Plan for Long-Term: The bilateral agreements and DPM 2025 create a 5-10 year growth runway. Plan your investments with a 3-5 year minimum holding period to capture LTCG benefits and avoid short-term volatility.
Conclusion
India's defence sector is at an inflection point. The Defence Procurement Manual 2025, bilateral partnerships with the US, Israel, and Australia, and the ₹25,060 crore Export Promotion Mission create a structural tailwind for defence stocks and manufacturers through 2029. For NRI investors, this represents a rare opportunity to participate in a high-growth, government-backed sector with clear visibility on demand.
The key is to act with a long-term perspective, diversify across multiple companies and investment vehicles, and stay informed about policy changes and bilateral developments. With careful planning and tax optimization, defence sector investments can deliver strong returns while supporting India's Make in India and Atmanirbhar Bharat goals.