India is poised to eliminate the capital gains tax on foreign portfolio investors' holdings in government securities, a strategic move to attract foreign investment amid the ongoing US-Iran conflict. This decision comes as part of a broader effort to stabilize the Indian economy, which has been affected by the geopolitical tensions in the Middle East.
Tax Reforms to Boost Investment
The Narendra Modi-led Union Cabinet has approved an ordinance to amend the Income Tax Act, paving the way for the proposed tax exemption. Currently, foreign investors face a 12.5% long-term capital gains tax on listed equities and bonds held for over a year, alongside a 20% withholding tax on interest income from government securities. The ordinance awaits the President's approval, after which a formal notification will be issued.
Impact of US-Iran Conflict
The geopolitical tensions have led to significant foreign capital outflows from India, with net FPI outflows reaching Rs 2.47 lakh crore in the current year, more than double the previous year's withdrawals. The Reserve Bank of India has intervened to stabilize the rupee, which hit a record low of 96.965 against the US dollar on May 20.
"The rupee's unprecedented fall has prompted policymakers to intensify measures to limit further depreciation," said a government official.
Additional Measures
In addition to tax reforms, the Reserve Bank of India is expected to classify select long-duration government securities under the Fully Accessible Route, allowing overseas investors to invest without ownership restrictions. This move follows the exclusion of 14-year and 30-year bonds from the program in 2024.
| Year | Net FPI Outflows (Rs lakh crore) |
|---|---|
| 2025 | 1.04 |
| 2026 | 2.47 |
Future Outlook
The Indian government is likely to announce further measures to attract foreign capital, as the country navigates the economic challenges posed by the US-Iran conflict. These efforts aim to bolster foreign exchange reserves and stabilize the national currency.
India's proactive approach in revising its tax policies and investment frameworks underscores its commitment to maintaining economic stability amid global uncertainties.
