India has approved the promulgation of an ordinance to eliminate capital gains tax for foreign portfolio investors on government securities, marking a significant shift in foreign investment policy. According to The Times of India, the PM Narendra Modi-led Union Cabinet on Wednesday cleared an ordinance that will amend the Income Tax Act to pave the way for this exemption. A notification is expected soon after the President gives her assent to the ordinance. This move comes as the government seeks to mitigate the economic impacts of the Iran war and address negative foreign portfolio flows and rupee depreciation. The government is also likely to unveil additional steps aimed at boosting foreign capital inflows as part of broader efforts to attract greater overseas investment. The Centre is likely to ease tax rules for foreign portfolio investors (FPIs) investing in Indian government securities, with the proposed changes expected to be brought through an ordinance amending tax provisions, as reported by Essential Business Intelligence.
Foreign investors currently face significant tax burdens on their Indian investments. As reported by The Times of India, foreign investors are currently required to pay a 12.5% long-term capital gains tax on listed equities and bonds held for more than a year, and interest income earned from government securities is subject to a 20% withholding tax. The government had ended the concessional 5% rate available to them in 2023. The latest move represents a substantial reduction from these existing tax obligations, with the ordinance route being used strategically to implement rapid policy changes. In response to persistent foreign capital outflows, market participants have been advocating for a reduction in both the long-term capital gains tax and the withholding tax levied on interest income from government securities. Market participants have since sought a more competitive tax framework, arguing that lower tax costs could improve India's appeal as a destination for global debt capital. The exemption on government securities is expected to significantly improve the yield attractiveness of Indian sovereign debt for overseas investors, who have long flagged the tax as a deterrent.
The rupee's slide to record lows has prompted authorities to step up efforts to stem its decline, with Prime Minister Narendra Modi calling on citizens to conserve foreign exchange amid a surge in oil import costs. According to The Times of India, the currency has been hurt by several factors including US trade tariffs, record foreign fund outflows, and the oil shock caused by the Iran war, all of which have strained the country's finances. The rupee touched a record low of 96.965 against the dollar on May 20 before recovering some ground, aided by increased intervention from the Reserve Bank of India and softer crude oil prices following renewed US-Iran peace efforts. The currency remains the second-worst performer in Asia this year, down more than 6% versus the dollar. On Wednesday, the currency settled at 95.71 per dollar, marking a decline of 0.5% for the day, while the yield on the benchmark 10-year government bond edged up by 1 basis point to 7.02%. The move is aimed at attracting overseas capital into India's debt market and supporting foreign inflows amid heightened uncertainty following tensions in West Asia.
Foreign portfolio flows have turned significantly negative, highlighting the urgency behind these tax reforms. As reported by The Times of India, in the current calendar year, net FPI outflows have reached ₹2.47 lakh crore, more than twice the ₹1.04 lakh crore withdrawn during calendar year 2025. This dramatic increase in outflows has prompted the government to take decisive action through the ordinance route, similar to how it used this mechanism in 2019 to cut the corporate tax rate to encourage private investment. The government may also announce a proposal allowing Persons Resident Outside India (PROIs) to invest in shares of listed Indian companies through the portfolio investment scheme, as part of broader measures to complement the government's efforts to make the Indian markets attractive for foreign capital. The proposed changes are expected to be brought through an ordinance amending tax provisions, with the government using this route to implement changes quickly while seeking parliamentary approval at a later stage.
By removing the capital gains burden on government securities, New Delhi is signalling its intent to deepen the participation of foreign capital in its sovereign bond market, a step that could also support the rupee and help manage India's borrowing costs. As reported by Zee News, government sources indicated that Wednesday's decision is not a standalone step, with further measures being planned to encourage capital inflows into India and to cushion the economy against the cascading effects of the ongoing West Asia conflict. The move comes at a time when global investors are reassessing emerging market exposures amid geopolitical uncertainty. The decision to implement the relief measure through an ordinance route demonstrates the government's commitment to fast-tracking the relief measure by bypassing the need to wait for a parliamentary session, with a formal notification expected to be issued by this week, according to government sources cited by ANI.
