India Eliminates Capital Gains Tax for Foreign Investors in Government Bonds
India's Strategic Tax Reform for Foreign Investors
In a pivotal decision aimed at addressing significant capital outflows, India has announced the removal of capital gains tax for Foreign Portfolio Investors (FPIs) involved in government bond investments. Previously, foreign investors faced a 12.5% long-term capital gains tax on listed shares and bonds held for over a year, alongside a 20% withholding tax on interest accrued from government bonds.
This initiative reflects the government's dedication to enhancing India's status as a premier global investment hub and to further developing the capital market. The Ministry of Finance has implemented various measures to simplify investment processes for Persons Resident Outside India (PROIs) and FPIs, aiming to attract stable, long-term foreign capital.
To encourage FPI participation in Government Securities (G-Sec), the government plans to broaden the range of specified securities under the Fully Accessible Route (FAR) to include new issuances in government securities with maturities of 15, 30, and 40 years, as well as Sovereign Green Bonds (SGrBs).
Additionally, the government has decided to eliminate three restrictions on FPI investments under the General Route: the short-term investment limit, concentration limit, and security-wise limit, while maintaining an overall quantitative investment cap of 6% for Central Government securities and 2% for State Government securities (SGSs). The investment limits for 'general' and 'long-term' categories will be consolidated into a single limit for government securities and SGSs.
These reforms are designed to attract a consistent inflow of long-term foreign capital, including investments from pension funds, insurance companies, and sovereign wealth funds, which is anticipated to enhance foreign exchange inflows into the country.
So far in 2026, foreign portfolio investors have withdrawn approximately ₹2.2 lakh crore, influenced by geopolitical tensions in West Asia, soaring crude oil prices, and a depreciating rupee. March marked a historic sell-off, with FPIs withdrawing nearly ₹1.17 lakh crore following escalating tensions in West Asia and Brent Crude prices exceeding $100 per barrel.