In a major step aimed at attracting foreign investment, the government has decided to remove capital gains tax on foreign investors investing in Indian government bonds.
Sources told India Today that the proposal was cleared by the Union Cabinet on Wednesday as part of a broader effort to boost capital inflows, support the rupee and cushion the economy from the impact of the ongoing Iran conflict and high crude oil prices.
The Cabinet has also approved an ordinance to amend the Income Tax Act to implement the changes. The decision will come into effect after receiving the President’s assent.
The move comes at a time when India is grappling with record foreign investor outflows, pressure on the rupee and rising energy costs triggered by the prolonged conflict in West Asia.
According to sources, the government’s objective is to encourage greater foreign investment into Indian debt markets and offset some of the economic challenges arising from the Iran war and elevated crude oil prices.
Foreign portfolio investors have sold nearly Rs 2.5 lakh crore worth of Indian equities this year, making 2026 one of the worst years on record for foreign fund outflows.
The heavy selling has weighed on the rupee and prompted calls from market participants for measures that would make Indian financial assets more attractive to overseas investors.
At present, foreign investors are required to pay 12.5% long-term capital gains tax on listed shares and bonds held for more than 12 months.
Under the new proposal approved by the Cabinet, capital gains tax on investments made by FPIs in Indian government securities, also known as G-Secs, will be completely abolished.
The government is also expected to address the tax burden on interest income earned from government bonds.
Currently, foreign investors pay a 20% withholding tax on interest earned from government securities. A concessional tax rate of 5% that was available earlier was withdrawn in 2023.
Market participants have long argued that the current tax structure reduces the attractiveness of Indian government bonds compared with competing emerging markets.
The government hopes the move will encourage larger foreign participation in India’s bond market and bring fresh dollar inflows into the country.
Higher foreign investment in government securities can help support the rupee, improve liquidity in the debt market and provide an additional source of capital at a time when equity inflows have remained weak.
The decision also assumes significance because India’s economy continues to face pressure from higher crude oil prices. Rising energy costs have increased concerns around inflation, the current account deficit and economic growth.
By attracting more foreign money into government bonds, policymakers are seeking to strengthen external finances and reduce pressure on the currency.
Sources indicated that the latest tax relief could be the first in a series of measures aimed at reviving foreign investor interest in India.
The government is understood to be considering additional steps to improve capital flows and make Indian financial markets more attractive to overseas investors.
Market participants will now watch for the formal notification of the ordinance and any accompanying announcements from the government and the Reserve Bank of India.
The decision marks one of the most significant tax reforms for foreign investors in recent years and underscores the government’s efforts to counter the impact of global economic uncertainty and geopolitical tensions on India’s financial markets.