The Centre has decided to remove capital gains tax on investments made by foreign portfolio investorsforeign portfolio investors (FPIs) in Indian government securities (G-Secs) of all tenures, a move aimed at attracting overseas capital and boosting demand for sovereign bonds. The decision was approved by the Union Cabinet, headed by Prime Minister Narendra Modi, to implement this through an ordinance amending tax provisions. It becomes effective from April 1, 2026.
The tax relief comes at a time when policymakers are looking to encourage foreign inflows into the debt market and support the rupee, which has faced pressure from rising crude oil prices and foreign fund outflows from equities.
FPIs have pulled out nearly Rs 2.2 lakh crore this year, compared with nearly Rs 1.6 lakh crore.
Currently, foreign investors are subject to a 12.5% long-term capital gains tax on listed bonds held for more than 12 months. Under the proposed change, capital gains arising from investments in Indian government securities will no longer be taxed for foreign instituational investors.
The government has also removed the 20% withholding tax on interest income earned by foreign investors from government bonds.
The rupee has depreciated around 5 percent against the dollar since the start of the Iran war on February 28. On June 3, the rupee was trading at 95.45 against the dollar after ending the previous session at 95.27.
Separately, the RBI on Friday also undertook a series of measures to attract more dollar inflows into the country, at a time when rising crude oil prices and record outflows from Indian equities have pushed the rupee to record lows. The RBI decisions are:
• All new issuances of 15-year, 30-year and 40-year government bonds will be a part of Fully Accessible Route
• Bonds under this category are part of three global indexes
• Limits on investment in other government securities will also be removed
• Limits for investments by Non-Resident Indians and Overseas Citizens of India are being increased, and extended to all individual persons residing outside India
• RBI will provide a facility of concessional forex swap for about four months till September 30
• RBI will also incentivise external commercial borrowings, by public sector undertakings
• RBI will allow a similar facility for bearing the full hedging cost till September 30 to banks for raising three to five year FCNRB deposits
• RBI will restore time for realisation for export proceeds to nine months.
