Government Approves Tax Break for Foreign Investors in Government Bonds
In a major policy move aimed at attracting overseas capital, the Centre has approved the removal of capital gains tax on foreign investments in Indian government securities (G-Secs), sources told India Today.
The proposal was cleared by the Union Cabinet on Wednesday and is part of a broader strategy to encourage foreign capital inflows, support the rupee and strengthen the economy amid rising crude oil prices and global geopolitical uncertainties.
To facilitate the change, the Cabinet has also approved an ordinance to amend the Income Tax Act. The new provisions will come into force after receiving the President’s assent.
Relief Amid Record Foreign Outflows
The decision comes at a time when India is witnessing significant foreign investor withdrawals from domestic markets.
According to sources, foreign portfolio investors (FPIs) have sold nearly Rs 2.5 lakh crore worth of Indian equities this year, putting pressure on financial markets and the rupee. The sustained outflows have prompted calls for measures that can make Indian assets more attractive to overseas investors.
The government believes that easing the tax burden on investments in sovereign debt could encourage fresh inflows into the country’s bond market and provide support to external finances.
What Has Changed?
At present, foreign investors pay a 12.5 per cent long-term capital gains tax on listed shares and bonds held for more than a year.
Under the new proposal, capital gains earned by foreign portfolio investors from investments in Indian government securities will be exempt from taxation.
The government is also expected to address the tax treatment of interest income earned from these bonds.
Currently, foreign investors are required to pay a 20 per cent withholding tax on interest income from government securities. Earlier, a concessional 5 per cent tax rate was available, but it was withdrawn in 2023.
Market experts have long argued that the existing tax structure made Indian government bonds less competitive compared to debt instruments offered by other emerging economies.
Why the Move Is Significant
Officials believe the tax relief will help attract greater foreign participation in India’s government bond market, bringing fresh dollar inflows into the economy.
Higher investments in government securities can improve liquidity in the debt market, help stabilise the rupee and provide an alternative source of foreign capital at a time when equity inflows remain subdued.
The move also gains importance as India grapples with the economic impact of higher crude oil prices. Rising energy costs have increased concerns over inflation, the current account deficit and overall economic growth.
By encouraging foreign investors to increase their exposure to government bonds, policymakers hope to strengthen India’s external position and reduce pressure on the currency.
More Reforms Under Consideration
Sources indicated that the latest announcement may be the first in a series of measures aimed at reviving foreign investor interest in Indian markets.
The government is understood to be examining additional reforms to improve capital flows and enhance India’s attractiveness as an investment destination.
Investors and market participants will now await the formal notification of the ordinance and any related announcements from the government and the Reserve Bank of India.
The tax exemption is being viewed as one of the most significant policy initiatives for foreign investors in recent years and reflects the government’s focus on boosting capital inflows during a period of global economic uncertainty.
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