India grants tax relief on G-secs to woo global capital and support rupee

In a move aimed at attracting more foreign investors into India’s debt market, the government has exempted overseas investors from paying income tax on earnings from government securities (G-secs).

According to an ordinance issued on Friday (June 5), the government amended the Income Tax Act to grant tax exemptions on both interest income and capital gains arising from the sale, exchange or transfer of government securities. The exemption will take effect retrospectively from April 1.

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

The benefit applies to Foreign Institutional Investors (FIIs) and the Bank for International Settlements (BIS), subject to prescribed reporting and disclosure requirements. The measure is expected to encourage greater foreign participation in government bonds and help support the rupee by attracting additional capital inflows.

Measure to attract foreign investors

Foreign investors are subject to a long-term capital gains tax of 12.5 per cent on listed shares and bonds held for more than 12 months. They also pay a withholding tax of 20 per cent on interest earned ‌on government bonds.

Meanwhile, the Reserve Bank of India (RBI) on Friday announced a series of measures aimed at attracting foreign capital and strengthening external financing buffers as global uncertainty and elevated energy prices weigh on emerging markets.

Government securities

The central bank expanded the universe of government securities eligible under the Fully Accessible Route (FAR) by including all new issuances of 15-year, 30-year and 40-year sovereign bonds.

The RBI also removed restrictions on short-term investments, concentration limits and individual security limits for Foreign Portfolio Investors (FPIs) investing through the General Route.

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RBI measures, coupled with tax exemptions announced on investments in government securities, are expected to support foreign participation in India's sovereign debt market and facilitate government borrowing at affordable interest rates.

The move also lends support to the rupee, which has weakened more than 6 per cent this year amid rising crude oil prices and foreign portfolio outflows from equities.

President signs Ordinance

The ordinance, signed by President Droupadi Murmu, defines the BIS as the international financial institution established in 1930 and headquartered in Basel, Switzerland. It also refers to the existing statutory definitions of FIIs and government securities under Indian law.

The gazette notification said the ordinance was necessary as Parliament was not in session and immediate action was required, invoking the President's ordinance-making powers under Article 123 of the Constitution.

Opening equity markets

The amendment is expected to support foreign participation in India's government bond market and facilitate investments by international financial institutions.

Also read: Expert decodes new I-T Act, explains what changes for ordinary taxpayers

The RBI also raised investment limits for non-resident Indians (NRIs) and Overseas Citizens of India (OCIs) in listed equity instruments without requiring registration with the securities regulator.

The facility has now been extended to all individual Persons Resident Outside India (PROIs), broadening access to Indian equity markets.

Overseas borrowing

To encourage overseas borrowing, the central bank said it would provide a concessional foreign-exchange swap facility until September 30, 2026, for external commercial borrowings (ECBs) raised by public sector undertakings.

In addition, authorised dealer banks will be eligible for a temporary facility under which the RBI will bear the full hedging cost for fresh three-to five-year Foreign Currency Non-Resident (Bank), or FCNR(B) (Foreign Currency Non-Resident (Bank), deposits mobilised until September 30, 2026.

Also read: Why India’s super-rich pay less tax and get away with it

The measures are aimed at attracting stable foreign capital flows, easing external financing conditions and strengthening India's balance of payments amid heightened global volatility.