In a significant move to attract foreign investments, India has eliminated the long-term capital gains tax on investments by Foreign Institutional Investors (FIIs) in government securities. Announced through an ordinance on Friday, the government now exempts FIIs from tax on interest income from government securities and capital gains from their sale, exchange, or transfer.
The Reserve Bank of India (RBI) also introduced measures to boost Foreign Portfolio Investment (FPI) by expanding the Fully Accessible Route (FAR) to include new issuances of 15-, 30-, and 40-year government bonds. Additionally, investment limits for Non-Resident Indians (NRIs) and Overseas Citizens of India (OCIs) in equity instruments without SEBI registration are being raised, allowing larger investments without regulatory registration. This facility is proposed to extend to all Persons Resident Outside India (PROIs).
The removal of capital gains tax on government securities investments for foreign investors is expected to enhance the attractiveness of India's bond market, potentially encouraging greater foreign participation in government debt. Analysts highlight that these measures are likely to support capital inflows and reinforce investor confidence amid global volatility.
“This move strengthens the attractiveness of India's bond market and could encourage greater foreign participation in government debt. At a time of heightened global volatility, these measures reinforce investor confidence, support capital inflows, and reaffirm India's commitment to building deeper, more globally integrated financial markets.”
Arun Poddar, CEO of Choice International
The policy is particularly beneficial for bond markets and well-capitalized banks and Non-Banking Financial Companies (NBFCs), which stand to gain from targeted hedging subsidies and systemic stability. However, rate-sensitive sectors may face challenges due to potential margin compression and inflation expectations.
While the RBI maintained the repo rate at 5.25%, its cautious tone suggests a focus on preserving macroeconomic stability amid global uncertainties. Analysts caution that future policy actions will depend on evolving growth-inflation dynamics and global developments.
Background
Historically, India has imposed capital gains taxes on foreign investments in government securities, which has been a deterrent for some investors. The current global economic climate, marked by volatility and uncertainty, has prompted India to take steps to make its financial markets more attractive to foreign investors.
These initiatives are expected to support capital inflows, deepen domestic bond markets, and provide short- to medium-term support to the Indian rupee. Investors are advised to focus on high-quality equities with strong pricing power to navigate geopolitical uncertainties.
