Government Eliminates Long-Term Capital Gains Tax to Lure Foreign Investment

In a strategic move to attract foreign investment, the Indian government has abolished the long-term capital gains tax on investments made by foreign institutional investors in government securities. This decision comes as foreign investors have significantly withdrawn from equities, prompting the government to seek stable, long-term capital. The rupee's decline and the impact of geopolitical tensions have further complicated the economic landscape, leading to increased efforts to stabilize the currency. This article delves into the implications of the new tax policy and its potential effects on India's economy.

By Narendra Chaudhary Jun 5, 2026, 11:38 IST

New Tax Policy Aimed at Attracting Foreign Investment

New Delhi: To boost dollar investments, the government has abolished the long-term capital gains tax on foreign institutional investors (FIIs) investing in government securities through a newly issued Ordinance.

This Ordinance modifies the Income Tax Act to implement the tax exemption.

The rationale behind this move is to attract stable, long-term capital, as government securities typically have extended maturities.

This decision comes in light of significant foreign investor withdrawals, totaling Rs 2.6 lakh crore from equities this year, surpassing the Rs 1.66 lakh crore withdrawn throughout 2025, largely due to geopolitical tensions.

In just the first three days of June, foreign investors withdrew approximately Rs 34,000 crore from equities, further exerting pressure on the Indian rupee.

Despite this, foreign investors have channeled over Rs 17,000 crore into the debt market via the Fully Accessible Route (FAR), although they have also withdrawn around Rs 4,000 crore under the general debt limit and Rs 340 crore through the Voluntary Retention Route (VRR) this year.

Currently, FIIs are subject to a 12.5% long-term capital gains tax on profits from equity and debt investments.

In the Union Budget of July 2024, the finance minister increased the LTCG tax rate on most assets from 10% to 12.5%. Meanwhile, short-term capital gains tax on listed shares in India is set at 15%, as per Section 111A of the Income Tax Act.

The rupee's decline to unprecedented lows has prompted authorities to intensify efforts to stabilize its value, with Prime Minister Narendra Modi urging citizens to conserve foreign exchange amid rising oil import costs due to the West Asia crisis.

The domestic currency has faced depreciation due to various factors, including US trade tariffs, substantial foreign fund outflows, and an escalating import bill, all of which have strained the country's finances. The Reserve Bank of India (RBI) typically utilizes its foreign exchange reserves to mitigate undue volatility in the rupee's value against the dollar.

On May 20, 2026, the rupee closed at a record low of 96.86 against the USD, a drop of 33 paise from its previous close.

Once regarded as one of Asia's more stable currencies, the rupee has now become one of the poorest-performing emerging market currencies this year, affected by a combination of high oil prices, capital outflows, widening trade deficits, and a strengthening US dollar.

So far in 2026, the rupee has depreciated by approximately 7% and has fallen around 6% since the onset of the Iran conflict on February 28.

At the beginning of the calendar year, the rupee was valued at 89.94 at the opening trade and closed at 89.98.

India's foreign exchange reserves decreased by USD 7.511 billion to USD 681.384 billion during the week ending May 22.

The reserves had previously reached an all-time high of USD 728.494 billion during the week ending February 27, before the Middle East conflict triggered a decline as the rupee faced pressure and the RBI intervened in the forex market through dollar sales.

As of January 2, 2026, India's forex reserves stood at USD 686.801 billion.

Additionally, the Reserve Bank of India has allowed certain long-tenor sovereign notes to be fully accessible, enabling overseas investors to purchase them without restrictions. The last adjustment to the list of government securities available under this route occurred in 2024, when the central bank removed 14-year and 30-year bonds.