Foreign Investors Receive Major Tax Boost as Government Eases Capital Gains Rules

Government Scraps Capital Gains Tax on Foreign Investment in G-Secs to Boost Capital Inflows

In a significant move aimed at attracting overseas capital and supporting financial markets, the government has approved the removal of capital gains tax on foreign investments in Indian government securities (G-Secs).

Sources said the proposal received the Union Cabinet’s approval on Wednesday as policymakers seek to strengthen capital inflows amid rising geopolitical uncertainties, pressure on the rupee and elevated crude oil prices linked to the ongoing conflict in West Asia.

To implement the decision, the Cabinet has also cleared an ordinance to amend the Income Tax Act. The changes will take effect after receiving the President’s assent.

Government Targets Fresh Foreign Investment

The tax relief comes at a time when India is facing substantial foreign fund outflows and increased pressure on its external finances.

Foreign portfolio investors (FPIs) have withdrawn nearly Rs 2.5 lakh crore from Indian equities so far this year, making 2026 one of the most challenging years for foreign capital outflows in recent memory.

The sustained selling has weighed on the rupee and raised concerns about liquidity and capital availability in domestic markets. Policymakers believe making Indian government bonds more attractive to global investors could help reverse some of these trends.

According to sources, the latest decision forms part of a broader strategy to draw long-term foreign capital into India’s debt markets and strengthen the country’s financial position amid global economic volatility.

What Will Change?

Currently, foreign investors are subject to a 12.5 per cent long-term capital gains tax on listed shares and bonds held for more than 12 months.

Under the new framework approved by the Cabinet, capital gains arising from investments by foreign portfolio investors in Indian government securities will be fully exempt from taxation.

The government is also expected to revisit the taxation of interest income earned from these investments.

At present, foreign investors pay a 20 per cent withholding tax on interest income from government bonds. A concessional 5 per cent tax regime that had previously been available was discontinued in 2023, a move that many market participants argued reduced India’s competitiveness compared to other emerging-market destinations.

The latest reforms are expected to improve the attractiveness of Indian sovereign debt for global investors seeking stable returns.

Why the Move Matters

Greater foreign participation in government securities can provide multiple benefits to the economy.

Higher inflows into the bond market can increase demand for Indian debt, improve market liquidity and bring additional dollar inflows into the country. Such inflows can help support the rupee at a time when global uncertainties and higher energy prices are creating pressure on the currency.

The move also comes against the backdrop of rising crude oil prices, which have heightened concerns about inflation, the current account deficit and economic growth.

By encouraging overseas investors to allocate more capital to government bonds, policymakers hope to strengthen India’s external balance sheet and reduce vulnerability to global shocks.

More Measures May Be on the Horizon

Sources indicated that the tax relief could be the first of several initiatives aimed at reviving foreign investor interest in India. The government is understood to be evaluating additional policy measures designed to improve capital flows, deepen financial markets and enhance India’s appeal as an investment destination.

Market participants will now await the formal notification of the ordinance, along with any related announcements from the government and the Reserve Bank of India.

The decision marks one of the most significant tax concessions for foreign investors in recent years and highlights the government’s efforts to attract global capital amid a challenging international economic environment.