FPI Inflows Into FAR Bonds Jump ₹8,795 Crore After Tax Exemption

Foreign portfolio investors (FPIs) have poured ₹8,794.74 crore into government securities under the Fully Accessible Route (FAR) after the government exempted them from paying tax on interest income and capital gains from these investments.

According to data from the Clearing Corporation of India Ltd (CCIL), FPI holdings in FAR securities rose to ₹3.32 lakh crore on 9 June from ₹3.23 lakh crore on 3 June, reflecting a sharp increase in foreign participation within days of the policy announcement.

What Is The Reason For This Inflow?

The government, on 5 June, announced that it is amending the Income Tax Act to exempt interest income and capital gains arising from the sale, exchange or transfer of government securities held by FPIs. Importantly, the exemption has been made effective retrospectively from 1 April 2025.

The tax relief removes two major costs for foreign investors. Earlier, FPIs were required to pay a 12.5% long-term capital gains tax on listed bonds held for more than 12 months, while interest income from government bonds attracted a 20% withholding tax.

At the same time, the Reserve Bank of India (RBI) announced additional measures to make government securities more attractive to foreign investors. The central bank expanded the FAR universe by including all new issuances of 15-year, 30-year and 40-year government securities.

The RBI also removed restrictions related to short-term investments, concentration limits and individual security exposure for FPI investments under the general route.

Global Bond Index Inclusion Gets a Boost

FAR securities allow non-resident investors to invest in specified Government of India bonds without any investment ceilings, making them one of the most accessible routes for foreign participation in the country's debt market.

Market participants believe the strong inflows strengthen India's case for inclusion in additional global bond indices.

As per a Business Standard report, nearly 75% of net FPI purchases in government securities during April and May were in the FAR category. The latest inflows show growing optimism among foreign investors and could support India's prospects of inclusion in Bloomberg's sovereign bond index, a decision that was deferred earlier this year.

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Sources:

Business Standard

Business Line