India plans capital gains tax waiver for foreign investors in government bonds: Report – Firstpost

India is planning to scrap capital gains tax on foreign portfolio investors (FPIs) investing in government securities, according to a report by The Economic Times, as New Delhi seeks to attract more overseas capital into the country’s debt market and support the rupee.

The proposal, approved by the Union Cabinet at a meeting on Wednesday, would eliminate capital gains tax on foreign investments in government bonds and could be implemented through an ordinance amending the Income Tax Act, the report said.

The move comes as India looks to strengthen foreign participation in its sovereign debt market at a time when the country is facing pressure on its currency and uneven foreign investment flows.

Under the current tax regime, foreign investors pay a 12.5 per cent long-term capital gains tax on listed shares and bonds held for more than 12 months. They are also subject to a 20 per cent withholding tax on interest income earned from government bonds.

According to the report, the government is also considering removing the withholding tax on interest earned from sovereign debt investments, a step that would further improve the attractiveness of Indian bonds for overseas investors.

The proposed tax changes would mark one of the most significant incentives offered to foreign investors since Indian government bonds were included in major global bond indices, a development that has helped draw international capital into the country’s debt market.

Foreign investors have remained net buyers of Indian government securities this year, investing a net $1.4 billion despite heightened volatility in global financial markets. In contrast, Indian equities have witnessed substantial foreign outflows, with nearly $28 billion withdrawn from the stock market during the same period.

The divergence highlights the growing appeal of India’s debt market, particularly as investors seek relatively stable returns amid uncertainty surrounding global growth, interest rates and geopolitical tensions.

Market participants have long argued that India’s tax structure places its bond market at a disadvantage compared with competing emerging economies. A removal of capital gains tax and interest withholding tax could narrow that gap and help attract a broader pool of long-term institutional investors, including sovereign wealth funds, pension funds and global asset managers.

The government has been pursuing a series of measures to deepen domestic capital markets and increase foreign participation in rupee-denominated assets. Easier tax treatment for foreign investors is expected to complement these efforts and strengthen India’s position in global fixed-income portfolios.

If implemented, the proposal could provide an additional boost to foreign demand for government securities, helping the government diversify its investor base while supporting capital inflows into the economy.

With inputs from agencies.