India has taken a significant step to attract foreign capital by promulgating an ordinance that exempts capital gains tax on investments made by Foreign Institutional Investors (FIIs) in government securities. This ordinance, approved by the Union Cabinet and chaired by Prime Minister Narendra Modi, amends the Income Tax Act to provide tax relief on both interest income and capital gains from government securities.
Tax Exemption Details
The ordinance, published in the Gazette of India, introduces amendments with retrospective effect from April 1, 2026. Under the revised provisions, FIIs will not be taxed on interest earned from government securities or capital gains from their sale, transfer, or exchange. This exemption is contingent upon compliance with certain requirements, including furnishing information in a prescribed format.
Impact on India's Debt Market
This measure is expected to enhance the attractiveness of India's sovereign debt market by eliminating tax liabilities for FIIs. Previously, foreign investors faced a 12.5% long-term capital gains tax on listed equities and bonds held for over a year, and a 20% withholding tax on interest income. The withdrawal of a concessional 5% tax rate in 2023 had further strained foreign inflows.
"The exemption is a strategic move to bolster foreign investments amidst global economic uncertainties," said Raghuram Rajan, former RBI Governor.
Expert Reactions
Economists and market analysts have welcomed the ordinance as a timely intervention. Arvind Subramanian, former Chief Economic Adviser, noted, "This tax relief aligns with global best practices and could significantly boost foreign participation in India's debt market."
Business Implications
For trade finance professionals and investors, this development reduces the cost of capital and enhances the competitiveness of Indian government securities. The exemption is likely to lower hedging costs and improve the risk-return profile for foreign investors, potentially leading to increased capital inflows and a more stable currency environment.
| Tax Type | Previous Rate | New Rate |
|---|---|---|
| Long-term Capital Gains | 12.5% | 0% |
| Interest Withholding | 20% | 0% |
The ordinance also extends similar tax treatment to the Bank for International Settlements (BIS), further broadening the scope of the exemption. As India seeks to stabilize its economy amid geopolitical tensions, such measures are crucial in maintaining investor confidence and ensuring sustainable growth.
