The Indian government has approved a significant policy change to scrap capital gains tax on foreign portfolio investments (FPIs) in government securities, according to a report from The Economic Times cited by FXStreet [1]. This decision was approved during a cabinet meeting on Wednesday and is expected to be implemented through an ordinance amending the Income Tax rules [1]. Currently, foreign investors are subject to a 12.5% long-term capital gains tax on listed shares and bonds held for more than 12 months, as well as a 20% withholding tax on interest earned from government bonds. The report indicates that the removal of the withholding tax on interest may also be considered [1].
The move is aimed at improving the inflow of foreign funds into the Indian economy, which has already seen net positive flows into government debt this year. Specifically, foreign investors have invested a net amount of $1.4 billion into Indian government debt, even as nearly $28 billion has been withdrawn from equity markets [1].
The policy change is expected to make Indian government bonds more attractive to foreign investors by increasing post-tax returns, potentially boosting demand for the Indian Rupee and supporting the country's financial markets [1]. No specific forward-looking statements or analyst opinions are provided in the article, but the context suggests the government is focused on enhancing foreign investment inflows [1].
CONCLUSION
India's decision to scrap capital gains tax on foreign investment in government bonds marks a major step to attract overseas funds and strengthen its debt markets. With positive net inflows into government debt already observed this year, the policy is likely to further enhance the appeal of Indian bonds to foreign investors. The move signals the government's commitment to fostering a favorable investment environment.