Centre plans Capital Gains Tax exemption for foreign investors in government bonds: Report

In a bid to attract foreign investment, the Centre has reportedly decided to remove capital gains tax on foreign investors who are investing in government bonds in India. Capital gains tax is a levy on the profit realised once an asset such as stocks, real estate, or mutual funds is sold for more than its original purchase price. The rate depends on the holding period and the type of asset.

Cabinet clears proposal

According to a report in India Today, quoting sources, the move received the Cabinet nod on Wednesday (June 3) as part of a wider initiative to increase capital inflows, boost the Rupee and shield the economy from the repercussions of the ongoing West Asia conflict that has upended global fuel supply and the high price of crude oil.

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The report further stated that the Cabinet has also given the green light to an ordinance to amend the Income Tax Act to execute the changes, adding that the decision will come into force after receiving the President's assent.

According to media reports, the Centre’s intention behind the move is to ensure further foreign investment in Indian debt markets and to deal with the economic challenges posed by the West Asia conflict.

Capital outflows backdrop

The proposed tax relief comes as India navigates a difficult phase marked by sustained foreign capital withdrawals, a weakening rupee and elevated energy prices linked to the continuing conflict in West Asia.

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Foreign portfolio investors (FPIs) have reportedly pulled out nearly Rs 2.5 lakh crore from Indian equities so far this year, placing 2026 among the steepest periods of foreign selling seen in recent years. The outflows have added pressure on the domestic currency and intensified calls for measures that could improve the appeal of Indian assets to global investors.

At present, overseas investors pay a 12.5 per cent long-term capital gains tax on listed securities held for more than a year. Under the Cabinet-approved proposal, however, gains arising from FPI investments in government securities, or G-Secs, would no longer attract capital gains tax.

Focus on bond market

The government is also examining the tax treatment of interest earned on such bonds. Foreign investors currently face a 20 per cent withholding tax on interest income after a concessional 5 per cent rate was discontinued in 2023.

Officials believe easier tax rules could draw fresh overseas money into the bond market, helping deepen liquidity and support the rupee. The move is also aimed at strengthening external finances at a time when higher crude oil prices are raising concerns over inflation and the current account balance.