Key Takeaways
- The Government remove 12.5% capital gains tax on foreign bond investments
- Foreign investors sold Rs 2.5 lakh crore in equities in 2026
- Interest tax at 20% remains under review for potential reduction
India has approved a key policy change to attract foreign capital by removing capital gains tax on foreign investments in government bonds. The decision comes as policymakers seek to support the rupee, improve liquidity and counter external economic pressures.
Tax Removal Aims To Boost Foreign Investment In Debt Market
The Union Cabinet has cleared a proposal to abolish capital gains tax for foreign portfolio investors investing in Indian government securities. The change will be implemented through an amendment to the Income Tax Act, which will take effect after receiving Presidential approval.
At present, foreign investors are required to pay 12.5% long-term capital gains tax on listed securities held for more than 12 months. Under the new framework, this tax will no longer apply to investments made in government bonds, also known as G Secs.
The move is designed to improve the attractiveness of Indian debt markets for overseas investors. Market participants have consistently pointed out that existing tax structures reduce competitiveness when compared with other emerging markets.
The decision comes at a time when India has seen significant foreign capital outflows. Foreign portfolio investors have sold nearly Rs 2.5 lakh crore worth of Indian equities in 2026, putting pressure on both financial markets and the rupee.
By easing tax conditions on government bonds, policymakers aim to redirect foreign capital toward debt markets and stabilise external financial conditions.
Government Targets Currency Stability And Capital Inflows
The policy shift is also linked to broader economic challenges, including rising crude oil prices and external uncertainties. Higher energy costs have increased concerns around inflation, current account deficit and overall economic stability.
In addition to capital gains tax removal, the government is expected to review the tax structure on interest income earned by foreign investors. Currently, a 20% withholding tax applies to interest from government securities, while a concessional rate of 5% was withdrawn in 2023.
A reduction in interest taxation could further enhance the appeal of Indian bonds, especially as global investors seek stable returns in emerging markets. Higher foreign participation in government securities can improve liquidity in the debt market and provide an additional source of dollar inflows.
Increased inflows into government bonds may also help support the rupee by strengthening foreign exchange reserves and reducing volatility in currency markets. The move is expected to complement broader efforts to maintain financial stability amid global economic shifts.
Sources indicate that this reform could be part of a wider set of measures aimed at reviving foreign investor interest. Policymakers are evaluating additional steps to improve capital inflows and enhance the overall investment environment.
Market participants are now awaiting formal notification of the ordinance and further clarity on interest tax adjustments. The role of the Reserve Bank of India will also be closely watched in aligning monetary and liquidity measures with this policy shift.
The decision marks a significant change in India’s approach to attracting foreign capital into its debt markets, with a focus on improving competitiveness, supporting the currency and strengthening financial resilience.
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