New Delhi : In a major step aimed at attracting foreign investment, the government has decided to remove capital gains tax on foreign investors investing in Indian government bonds. Sources media that the proposal was cleared by the Union Cabinet on Wednesday as part of a broader effort to boost capital inflows, support the rupee and cushion the economy from the impact of the ongoing Iran conflict and high crude oil prices.
The move comes at a time when India is grappling with record foreign investor outflows, pressure on the rupee and rising energy costs triggered by the prolonged conflict in West Asia. According to sources, the government’s objective is to encourage greater foreign investment into Indian debt markets and offset some of the economic challenges arising from the Iran war and elevated crude oil prices.
The heavy selling has weighed on the rupee and prompted calls from market participants for measures that would make Indian financial assets more attractive to overseas investors. At present, foreign investors are required to pay 12.5% long-term capital gains tax on listed shares and bonds held for more than 12 months.
The government is also expected to address the tax burden on interest income earned from government bonds. Currently, foreign investors pay a 20% withholding tax on interest earned from government securities. A concessional tax rate of 5% that was available earlier was withdrawn in 2023. Market participants have long argued that the current tax structure reduces the attractiveness of Indian government bonds compared with competing emerging markets.
Higher foreign investment in government securities can help support the rupee, improve liquidity in the debt market and provide an additional source of capital at a time when equity inflows have remained weak. The decision also assumes significance because India’s economy continues to face pressure from higher crude oil prices.
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