India moves to ease taxes on foreign bond inflows

India’s Union Cabinet has approved a proposal to abolish capital gains tax on foreign portfolio investors’ holdings of Indian government securities. The move is aimed at making sovereign debt more attractive to overseas investors and encouraging fresh foreign capital inflows into the bond market.

To implement the change, the Cabinet has authorised the use of an ordinance to amend the Income Tax Act. The measure will come into effect after the President gives assent, and formal notification steps are completed, according to reporting on the decision.

The exemption specifically targets foreign portfolio investments in government securities, often referred to as G‑Secs. By removing capital gains tax on these investments, authorities intend to alter the relative after‑tax returns in favour of Indian sovereign bonds for global investors.

Alongside the capital gains change, officials are reported to be examining the 20% withholding tax currently applied to interest income that foreign investors earn on Indian government securities. Coverage indicates that authorities may remove or substantially reduce this levy, though no final decision has been announced.

Any adjustment to the withholding tax would affect the regular income stream that overseas investors receive from holding Indian sovereign debt. Together with the capital gains exemption, a lower or zero withholding rate would further improve the post‑tax returns available to foreign portfolio investors.

Reports do not specify a timeline for potential changes to the withholding tax. Government and central bank officials did not immediately comment in the coverage of these deliberations.

Regulators are also considering steps beyond taxation to attract foreign investment into Indian sovereign debt. The Reserve Bank of India is reported to be likely to expand the list of government securities eligible under the Fully Accessible Route (FAR).

The FAR framework allows foreign investors to purchase designated government securities without investment limits. Under the reported plan, certain long‑duration bonds would be added to the FAR list, giving overseas investors unrestricted access to a broader range of maturities.

Expanding FAR eligibility for long‑dated bonds would complement the tax changes by easing regulatory constraints on foreign participation in the sovereign debt market, particularly at the longer end of the yield curve.

The proposed measures are part of a broader policy push to attract foreign capital and support the Indian rupee. Coverage states that officials explicitly aim to counter pressure from higher oil prices and significant foreign portfolio outflows from domestic markets.

One report cited nearly Rs 2.5 lakh crore of equity sales by foreign portfolio investors so far this year. Over the same period, the rupee has weakened by more than 5%, according to the reporting referenced in the coverage.

By making government securities more appealing through tax relief and expanded market access, authorities seek to encourage greater foreign participation in sovereign debt. Implementation of the Cabinet’s decisions will depend on the ordinance process and presidential assent, as described in the reports.