Amid record foreign investor outflows, rising crude oil prices, and geopolitical uncertainty linked to the Iran conflict, the government has rolled out a major tax incentive to make India’s bond market more competitive globally.
BY PC Bureau
New Delhi, June 4, 2026: In a significant policy move aimed at reversing foreign capital outflows and strengthening India’s external finances, the Union Cabinet has approved the complete abolition of capital gains tax on investments by Foreign Portfolio Investors (FPIs) in Indian government securities (G-Secs).
Sources familiar with the development told India Today that the measure is intended to make Indian sovereign debt significantly more attractive to overseas investors at a time when global geopolitical tensions and economic uncertainty are weighing heavily on capital flows.
The Cabinet has also approved an ordinance to amend the Income Tax Act to give effect to the decision. The changes will come into force after receiving the President’s assent.
Mounting Economic Pressures
The decision comes amid heightened geopolitical tensions stemming from the prolonged Iran conflict, which has disrupted global energy markets and pushed crude oil prices higher.
For India, one of the world’s largest energy importers, rising oil prices have increased concerns over inflation, the current account deficit, and economic growth. The country is also grappling with substantial foreign investor withdrawals from domestic markets.
Foreign portfolio investors have sold nearly Rs 2.5 lakh crore worth of Indian equities in 2026 so far, making it one of the worst years for foreign fund outflows in recent memory. The sustained selling has put pressure on the rupee, tightened liquidity conditions, and increased volatility across financial markets.
Against this backdrop, policymakers are looking to attract foreign capital through debt markets, which are generally viewed as a more stable source of long-term investment.
Key Tax Changes
Under the existing tax framework, FPIs are required to pay a 12.5 per cent long-term capital gains tax on listed securities, including bonds, held for more than 12 months.
The new proposal removes capital gains tax entirely on investments made by foreign investors in Indian government securities.
The government is also understood to be examining additional relief on interest income earned from government bonds.
Currently, foreign investors pay a 20 per cent withholding tax on interest earned from G-Secs. A concessional rate of 5 per cent, which had made Indian debt more competitive internationally, was withdrawn in 2023.
Industry bodies and market experts have long argued that the higher tax burden has reduced the attractiveness of Indian bonds compared with other emerging markets such as Indonesia, Brazil, and Mexico.
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Strategic Objectives
The government expects the tax relief to serve multiple objectives:
- Encourage fresh foreign investment into India’s bond markets.
- Increase dollar inflows and help stabilise the rupee.
- Deepen liquidity in the domestic debt market.
- Diversify government funding sources at a time when equity inflows remain weak.
- Strengthen India’s external sector against oil price shocks and global financial volatility.
Analysts believe the move could encourage both existing FPIs and long-term institutional investors to increase allocations to Indian debt, particularly as India’s government bond market continues to gain prominence in global fixed-income indices.
Wider Economic Significance
The reform assumes greater importance as India navigates an increasingly uncertain global environment.
Persistently high crude oil prices threaten to widen the current account deficit and fuel inflationary pressures, potentially complicating monetary policy. Greater foreign participation in government securities could partially offset these risks by improving capital inflows and strengthening external balances.
Market participants have largely welcomed the decision, describing it as a timely and pragmatic step to enhance India’s competitiveness as an investment destination.
Several foreign investors have reportedly raised concerns about India’s tax treatment of debt investments during recent consultations with policymakers, making the latest reform a direct response to longstanding industry demands.
More Reforms Likely
Sources indicate that the abolition of capital gains tax may be the first in a broader series of measures aimed at reviving foreign investor interest.
The government and the Reserve Bank of India are reportedly evaluating additional reforms, including:
- Further rationalisation of withholding taxes on debt instruments.
- Simplification of regulatory and compliance requirements for FPIs.
- Enhancements to the Fully Accessible Route (FAR) framework for foreign investment in government securities.
- Potential incentives for long-term investors such as sovereign wealth funds and pension funds.
Market participants are now awaiting the formal notification of the ordinance and any accompanying announcements from the Finance Ministry and the RBI.
A Significant Liberalisation Measure
If implemented as planned, the abolition of capital gains tax on FPI investments in government securities could rank among the most significant liberalisation measures for foreign debt investors in more than a decade.
The move underscores the government’s determination to safeguard economic stability amid global uncertainty while reinforcing India’s position as a preferred destination for international capital.
For policymakers seeking to sustain high economic growth and maintain financial stability, restoring robust foreign capital inflows remains a critical priority. The latest decision represents a major step in that direction.
