India To Scrap Capital Gains Tax On Foreign Investment In Government Securities

India is set to remove capital gains tax on foreign portfolio investors (FPIs) holdings in government securities (G-Secs), with the Union Cabinet approving an ordinance on Wednesday to amend the Income Tax Act, according to sources familiar with the matter. A formal notification will follow once the President gives assent.

The move is aimed at attracting overseas capital to cushion the economy from the financial fallout of the Iran war, as the rupee weakens and foreign money exits Indian markets at an accelerating pace.

What Changes

Foreign portfolio investors currently pay:

• 12.5% long-term capital gains tax on listed shares and bonds held over 12 months.

• 20% withholding tax on interest earned from government bonds.

Both levies are under review. The government is set to remove the capital gains tax on government securities and may also scrap the 20% withholding tax on bond interest, according to a source who sought anonymity as the decision has not yet been made public.

India is among a handful of countries that tax non-resident flows into debt markets, putting it at a structural disadvantage in competing for global fixed-income capital. The source noted that India broadly aligns with global norms on equity taxation but stands out on the debt side.

India's benchmark bond yield eased one basis point to 7.01% in early trade following the report.

Why Now

Foreign portfolio investor outflows from Indian equities have reached ₹2.47 lakh crore so far in 2026, more than double the ₹1.04 lakh crore withdrawn through all of 2025. The rupee hit a record low of 96.965 against the dollar on 20 May before recovering, supported by Reserve Bank of India intervention and easing oil prices following renewed US-Iran peace talks.

While equity outflows have been severe, foreign investors have maintained net positive flows into Indian government debt of around $1.4 billion this year, suggesting bond market demand exists but could be significantly larger with tax friction removed.

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The government previously used the ordinance route in 2019 to cut corporate tax rates. Additional measures to encourage capital inflows are expected to follow the government securities tax change.

Sources:

Reuters

Business Today