India unveils tax breaks, bond market reforms to woo foreign investors as RBI seeks dollar inflows – Firstpost

India on Friday unveiled package of tax incentives and market reforms aimed at attracting foreign capital, as the government and the Reserve Bank of India (RBI) moved to bolster dollar inflows, deepen the sovereign debt market and strengthen the country’s external position amid rising global uncertainty and persistent foreign portfolio outflows.

The measures, announced alongside the RBI’s decision to keep the benchmark repo rate
unchanged at 5.25 per cent, include a complete exemption from tax on interest income and capital gains from government securities for eligible foreign investors, wider access to sovereign bonds and a series of steps to encourage overseas capital inflows.

The reforms come at a time when the RBI has
raised its inflation forecast for FY27 by 50 basis points to 5.1 per cent, citing the impact of the conflict in West Asia, elevated energy prices and potential supply-chain disruptions. Net foreign portfolio investor (FPI) outflows have also reached $13.7 billion so far in FY27, largely driven by selling in the equity segment.

Tax exemption for foreign investors

The Centre said foreign portfolio investors and the Bank for International Settlements (BIS) would be exempt from income tax on interest earned and capital gains arising from investments in government securities from April 1, 2026.

Under the previous regime, foreign investors paid a 12.5 per cent long-term capital gains tax on government bonds held for more than 12 months and a 20 per cent short-term capital gains tax on securities held for less than a year. Both tax liabilities have now been removed.

The Finance Ministry said the move would make India’s debt market more globally competitive and help attract stable long-term foreign capital. The exemption brings the tax treatment of Indian government bonds closer to that in several competing jurisdictions and is expected to boost demand from overseas investors.

Wider access to government bonds

The government and the RBI also announced a significant liberalisation of investment rules for foreign investors in government securities.

RBI Governor Sanjay Malhotra said all new issuances of 15-year, 30-year and 40-year government securities would be included under the Fully Accessible Route (FAR), allowing unrestricted participation by overseas investors.

The government has also expanded the FAR framework to include Sovereign Green Bonds of eligible tenors, creating another avenue for global investors, particularly those with environmental, social and governance (ESG) mandates.

In addition, restrictions relating to short-term investments, concentration limits and security-wise caps applicable to FPI investments in government securities under the General Route have been removed. However, the overall investment ceiling of 6 per cent of outstanding Central Government securities and 2 per cent of State Government Securities will remain in place.

The government said the changes would help develop a smoother sovereign yield curve and attract long-term institutional investors such as pension funds, insurance companies and sovereign wealth funds.

“These measures, along with the tax benefits provided by the government this morning, should help attract foreign capital for government borrowing,” Malhotra said.

Opening the door to more overseas investors

In a separate reform, the government has opened the Portfolio Investment Scheme to all individual Persons Resident Outside India (PROIs), a facility that was previously restricted to Non-Resident Indians (NRIs) and Overseas Citizens of India (OCIs).

Under the revised framework, the investment limit for an individual overseas investor in a listed Indian company has been increased to 10 per cent from 5 per cent, while the aggregate limit for all such investors has been raised to 24 per cent from 10 per cent.

The Finance Ministry said the move would simplify market access, reduce compliance requirements and broaden the pool of relatively stable foreign investors participating in Indian equity markets.

RBI rolls out forex measures

To encourage fresh foreign currency inflows, the RBI announced a concessional foreign exchange swap facility until September 30, 2026, for public sector undertakings raising external commercial borrowings (ECBs).

A similar facility will provide full hedging-cost support to banks raising fresh three- to five-year Foreign Currency Non-Resident Bank [FCNR(B)] deposits until September 30.

The central bank also restored the period for realisation and repatriation of export proceeds to nine months from the pandemic-era extension of 15 months, a move aimed at accelerating foreign exchange inflows and improving liquidity in the foreign exchange market.

FPI outflows remain a concern

The package comes despite continued strength in foreign direct investment.

Malhotra said robust gross FDI and higher net FDI inflows in 2025-26 underscored sustained global confidence in the Indian economy, with April 2026 also recording encouraging inflows.

Portfolio flows, however, have remained volatile. According to RBI data, net FPI outflows stood at $13.7 billion during the current financial year through June 2, primarily due to equity market selling.

The RBI governor reiterated that the central bank remains committed to a market-determined exchange rate regime and does not target any specific level for the rupee. However, he said the RBI would continue to act against excessive volatility and disorderly market movements.

“While our foreign exchange reserves provide a strong buffer against external shocks, we have a broad range of regulatory and market-based instruments to respond effectively as may be required,” Malhotra said.

India’s foreign exchange reserves stood at $682.3 billion as of May 29, providing a substantial cushion against global financial turbulence, he added.

The rupee strengthened by 32 paise following the announcements, aided by the reform package, stable crude oil prices and optimism over a potential India-US trade agreement.