India Scraps Capital Gains Tax on G-Secs For Foreign Investors to Halt FPI Exodus

In a significant policy move aimed at boosting foreign capital inflows amid global economic uncertainty linked to the ongoing Iran conflict, the Union Government has reportedly approved an ordinance to amend the Income Tax Act, according to official sources. The proposed changes are expected to ease tax burdens on foreign portfolio investors (FPIs) and strengthen India’s position in global financial markets at a time of heightened volatility.

Sources indicate that the ordinance, approved by the Union Cabinet chaired by Prime Minister Narendra Modi, proposes a complete removal of capital gains tax on investments made by FPIs in Indian government securities (G-secs). The measure will come into effect after receiving presidential assent, marking a major shift in India’s approach to attracting long-term foreign investment in debt markets.

At present, foreign investors are subject to a 12.5 percent long-term capital gains (LTCG) tax on bonds and listed equities held for more than 12 months. In addition, a 20 per cent withholding tax is levied on interest earned from government securities. The new proposal aims to eliminate these charges on select instruments, making India’s debt market more competitive for global investors.

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The development comes at a time when foreign institutional investors have been significantly reducing exposure to Indian equities, with net outflows reportedly touching ₹2.5 lakh crore in recent months. Officials believe the tax relief could help reverse this trend and restore investor confidence, especially as global markets react to geopolitical instability and shifting risk perceptions.

Economic experts note that India’s capital gains tax structure has often been cited as a disadvantage compared to financial hubs such as Singapore and Hong Kong, where foreign investors typically do not face similar taxation on capital gains. Analysts suggest that while tax policy is not the sole driver of investment decisions, it remains a critical factor in improving India’s competitiveness in attracting global funds.

According to market observers, further reforms may be considered to stabilize foreign inflows and strengthen forex reserves if global uncertainties persist. Finance Minister Nirmala Sitharaman has also indicated openness to reviewing capital gains tax structures, suggesting that the current proposal could be part of a broader strategy to make India a more attractive destination for international investors.

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