India exempts foreign investors from tax on government securities to stem capital outflows
The Indian government today issued an ordinance confirming the matter
India has exempted foreign investors from income tax on interest earnings and capital gains from government securities in a move aimed at attracting overseas capital and easing pressure on the national currency, which recently hit a record low against the US dollar.
The government today (5 June) issued an ordinance amending the Income Tax Act to grant tax exemptions on interest income and capital gains arising from the sale, exchange, or transfer of government securities.
According to a gazette notification dated 5 June, the measure will take effect retrospectively from 1 April this year.
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In a statement, finance ministry said the exemption will apply to any interest income or capital gains earned by foreign portfolio investors (FPIs) on government securities on or after 1 April.
The initiative is intended to make India's debt market more attractive to foreign investors while helping protect the economy from the financial impact of the ongoing conflict in West Asia.
The ordinance was approved by the Cabinet, chaired by Prime Minister Narendra Modi, earlier this week.
Currently, foreign investors are subject to a 12.5% long-term capital gains tax on listed equities and bonds held for more than one year.
Interest income from government securities is also taxed through a 20% withholding levy. A concessional tax rate of 5% that had previously been available to foreign investors was withdrawn in 2023.
The move comes as India faces sustained foreign capital outflows and pressure on the rupee. Foreign portfolio investment flows have remained negative amid geopolitical uncertainty linked to the conflict in West Asia.
Since the beginning of 2026, net FPI outflows have reached Rs2.47 lakh crore, more than double the Rs1.04 lakh crore withdrawn during the whole of 2025.
The Indian rupee weakened to an all-time low of Rs96.965 against the US dollar on 20 May before recovering some of its losses.
Economists said the tax exemption could help improve investor sentiment, encourage foreign participation in government debt markets, and support the rupee by boosting capital inflows.
