The government announced the removal of long-term capital gains tax on investments made by foreign institutional investors (FIIs) in government securities on Friday. According to reports from PTI, this decision aims to attract foreign inflows amid significant outflows from Indian markets. The tax relief extends beyond equity investments, as a source familiar with the matter confirmed on Thursday (June 4, 2026) that India plans to scrap capital gains tax on foreign portfolio investments in government securities. 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, along with a withholding tax of 20% on interest earned in government bonds. As reported by the source, India stands among the few countries that tax non-resident flows into debt, while being more or less in line with global standards on equity taxation. The exemption shall be applicable w.e.f. 01.04.2026, meaning any interest or capital gains arising to FPIs on or after this date in respect of investments in G-Secs will be exempt from income tax.
The government has decided to expand the list of specified securities under the Fully Accessible Route (FAR) to include new issuances in Government securities in tenors of 15, 30 and 40 years as also Sovereign Green Bonds (SGrBs) in the tenors of FAR-eligible securities. With respect to FPI investments under General Route, it has been decided to remove the three restrictions, viz. short-term investment limit, concentration limit and the security-wise limit for investments by Foreign Portfolio Investors (FPIs) in Government securities, while retaining the overall quantitative investment limit of 6 per cent of the outstanding stock of the Central Government securities and 2 per cent of the State Government securities (SGSs). The sub-categories of investment limits, viz., 'general' and 'long-term' will also be merged into a single limit for investment in Government securities and SGSs, respectively. These measures are expected to help in development of a smooth yield curve, and attract stable systematic inflow of long-term, patient foreign capital, including long-term investors such as pension funds, insurance companies, and sovereign wealth funds.
The tax relief comes as foreign investors have pulled out nearly $28 billion from equity markets this year, pressuring the Indian rupee. As reported by PTI, these outflows have already crossed the ₹1.66 lakh crore withdrawn in the entire 2025 due to geopolitical tensions. However, foreign investors have maintained net positive flows of $1.4 billion into Indian government debt this year. They withdrew about ₹4,000 crore under the general debt limit and ₹340 crore through the Voluntary Retention Route (VRR) so far this year. The rupee has depreciated more than 5% since the start of the year, squeezed by higher oil prices and foreign portfolio outflows in equities.
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. According to PTI reports, the domestic currency has been depreciating due to several factors including US trade tariffs, record foreign fund outflows, and a rising import bill, putting pressure on the country's fiscal position. The government has stepped up efforts to cap the downside in the domestic unit through this tax relief measure. India's benchmark bond yield eased one basis point to 7.01% in opening trade following the announcement, though it remains unclear when the tax plan will take effect.
Sachin Sawrikar, Founder and Managing Partner of Artha Bharat Investment Managers, described the move as protecting what is working in the market. As reported by PTI, he noted that debt was the one segment that held steady while FIIs were net sellers in equities through much of FY26. Madhavi Arora, Chief Economist at Emkay Global Financial Services, noted that any tax easing should help flows at the margin, though she cautioned it won't be a magic bullet in the current context. She added it could prove positive in the medium term, as India has been scrapping investment limits on certain securities under a so-called 'fully accessible route' in recent years to attract more foreign capital. These reforms are expected to reduce operational complexities, simplify market access, and provide a more seamless investment experience comparable with leading international financial markets.
