In order to attract foreign inflows, the government on Friday announced the removal of long-term capital gains tax on investments made by foreign institutional investors () in government securities.
The decision comes at a time when have pulled out a massive ₹2.6 lakh crore from equities so far this year, pressuring the Indian rupee. The outflows have already crossed the ₹1.66 lakh crore withdrawn in the entire 2025 because of geopolitical tension.
However, foreign investors have invested over ₹17,000 crore in the debt market through Fully Accessible Route (FAR). However, they withdrew about ₹4,000 crore under the general debt limit and ₹340 crore through the Voluntary Retention Route (VRR) so far this year, according to PTI report.
Currently, FIIs are required to pay Long Term Capital Gains (LTCG) tax of 12.5% on their gains from investment in equity and debt investments.
The rupee slide has prompted the government to step up its efforts to cap the downside in the domestic unit. The domestic currency has been depreciating by several factors, including US trade tariffs, record foreign fund outflows, and a rising import bill, putting pressure on the country’s fiscal.
The rupee has depreciated about 7% so far in 2026 and is down roughly 6% since the outbreak of the Iran conflict on February 28.
“Removing the tax friction on government securities for FPIs is a good step. In FY26, debt was the one segment that held steady. FPIs were net sellers in equities through much of the year. This ordinance protects what is working. But the two pools of capital are different investors with different mandates and different return expectations. Making gilts cheaper to own does not address why long-only equity investors have been cautious on India,” Sachin Sawrikar, Founder and Managing Partner, Artha Bharat Investment Managers.
“The capital gains structure, the currency risk, the valuation premium over peers. That is where the silence is. The real ask from foreign investors has always been on equities. That remains unanswered,” he added.
Separately, the Reserve Bank of India permitted some long-tenor sovereign notes as fully accessible, allowing overseas investors to buy them without limits. The previous tweak to the list of government securities available under this route was in 2024, when the central bank removed 14-year and 30-year bonds.
(With inputs from PTI)