Government May Cut 20% Bond Tax To Attract Foreign Investors

The Indian government is considering a fresh set of measures to attract more foreign investors into its government bond market, including possible tax concessions and easier investment rules.

According to The Economic Times, officials are working on proposals that could make Indian government bonds more attractive to overseas investors, particularly after the country’s inclusion in major global bond indices.

What Changes Are Being Considered?

One of the key proposals under consideration is a substantial reduction in taxes paid by foreign investors on bond investments. The government is evaluating whether to completely remove the 20% tax on interest earned from bonds by overseas investors or reduce it sharply, according to people familiar with the matter.

The proposed tax relief is aimed at making Indian bonds more competitive for global funds at a time when policymakers are looking to attract a larger pool of international capital.

Separately, the Reserve Bank of India (RBI) is expected to expand access to certain government securities through the Fully Accessible Route (FAR) framework.

Under this proposal, some long-term sovereign bonds could be designated as FAR securities. This will allow foreign investors to buy those bonds with no limits on their investment so that global funds can easily accumulate positions in the Indian debt market.

The foreign investment restructuring (FAR) route was initiated with an objective to make the foreign participation in government securities policy inviting with minimum formalities and compliance issues.

The most recent major modification to the framework happened in 2024 when the Reserve Bank of India eliminated from the list of securities allowed under the foreign investor route 14-year and 30-year government bonds.

Why Is This Being Proposed Now?

The measures are being considered as India seeks to deepen its bond market and attract a greater share of global fixed-income investments. Easier access and lower taxes could improve post-tax returns for overseas investors and increase the appeal of Indian sovereign debt compared with other emerging-market destinations.

The proposals come at a time when policymakers are looking for ways to support the rupee, which has fallen over 6% this year, amid concerns over higher oil prices. First of all, increased crude prices may further enlarge India's import bill and can lead to additional depreciation pressure on the domestic currency.

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Secondly, some officials believe that inflows of foreign investment into government bonds could be one way to counter some of these pressures, as it would bring in additional foreign capital into the country.

However, the disclosed plans are not yet ready for public release, and no final decision has been made, as the matter is still under re-examination.

Sources:

ET BFSI

News18