India has officially confirmed plans to scrap capital gains tax on foreign portfolio investments in government securities, according to a source familiar with the matter as reported by Reuters on Thursday. The South Asian nation is looking to attract foreign capital to counteract pressure on its rupee currency, which has weakened more than 5% since the start of the year, squeezed by higher oil prices and foreign portfolio outflows in equities. The Economic Times newspaper was the first to report Wednesday's cabinet approval of the plan, with the finance ministry not immediately responding to requests for comment. A withholding tax of 20% that foreign investors pay on interest earned in government bonds may also be removed, the source said.
Foreign Institutional Selling in the Indian markets has already crossed ₹2.2 lakh crore so far in 2026 in just the first five months of the year. However, foreign investors have maintained net positive flows into Indian government debt this year, investing $1.4 billion, while nearly $28 billion has been pulled from equity markets. The inclusion of 23 Indian government bonds within the JPMorgan GBI-EM Global Diversified index began in June 2024, with a staggered addition to reach the 10% limit. Only Indian government bonds that are designated under the Fully Accessible Route (FAR) by the Reserve Bank of India (RBI) are eligible for these global indices.
Shares of PNB Gilts, a designated Primary Dealer (PD) by the Reserve Bank of India, gained as much as 9% after the news break before cooling off from the highs. The stock is currently trading 5% higher at ₹90.36. The stock had gained over 15% on May 14 as well, when the story was first reported by Bloomberg. PNB Gilts entire business is centered around the buying and selling of G-Secs, treasuries, and corporate bonds.
When PNB Gilts builds up its own investment portfolio of bonds, it will earn interest income via coupon payments that is both steady as well as predictable. For ensuring that the bond issuances hit the market successfully, PNB Gilts charges the issuers a commission. In case of higher bond supply and investor appetite, the fee pool for the company will directly increase in proportion. A bigger and more liquid bond market also helps the company enter or exit large positions, without causing any sharp swings in these trades on either side.
Bloomberg has officially deferred the inclusion of Indian bonds in its flagship Bloomberg Global Aggregate Index. The news has also been reported by multiple other news outlets, indicating widespread industry interest in this potential tax reform for foreign investment in Indian government securities. India stands more or less in line with global standards on equity taxation, but is among the few countries that tax non-resident flows into debt, according to the source familiar with the matter.
