India plans tax relief for foreign investors to boost inflows
What's the story
The Indian government is planning to waive capital gains tax for foreign portfolio investors (FPIs) investing in government securities. The move is aimed at boosting overseas capital inflows and supporting the rupee amid the ongoing US-Iran war's economic impact. The Cabinet, led by Prime Minister Narendra Modi, has approved promulgation of an ordinance to amend the Income Tax Act for this exemption.
Tax details
Current tax regime for foreign investors
Under the current tax regime, foreign investors are subject to a 12.5% long-term capital gains (LTCG) tax on listed shares and bonds held for over 12 months. They also pay a 20% withholding tax on interest income from government bonds. The Indian government had removed the concessional 5% rate for these investors in 2023.
Tax reduction
Market calls for tax reduction amid capital outflows
Market participants have been calling for a reduction in LTCG tax and withholding tax on interest income from government bonds. This is amid continued capital outflows from India. The latest move comes as foreign portfolio flows turn negative and the rupee depreciates sharply against the dollar due to the West Asia conflict.
Market impact
FPIs exited ₹2.47 lakh crore in investments this year
So far in the calendar year, FPIs have exited a net ₹2.47 lakh crore worth of investments, more than double the ₹1.04 lakh crore they pulled out in calendar 2025. The rupee hit an all-time low of 96.965 against the dollar on May 20 but has since recovered as the Reserve Bank of India has stepped up support and oil prices eased after renewed US-Iran peace efforts.
Capital attraction
Government efforts to attract foreign investment in Indian markets
The Indian government has been taking steps to make the markets attractive for foreign capital. This includes the proposed tax changes, which would be one of the biggest incentives for foreign investors since Indian government bonds were included in major global bond indices. Notably, foreign investors have remained net buyers of Indian government securities this year, investing a net $1.4 billion.