In a major policy move aimed at strengthening capital inflows and stabilizing the rupee, the Indian government has abolished capital gains tax on foreign investments in government securities. The decision is expected to make India’s bond market more attractive to overseas investors and deepen foreign participation in the country’s debt market.
The measure was introduced through the Income-tax (Amendment) Ordinance, 2026, promulgated by President Droupadi Murmu. Under the revised framework, foreign institutional investors and the Bank for International Settlements will no longer be required to pay capital gains tax on income earned from the sale, transfer or exchange of Indian government securities. Interest income from these securities will also receive tax benefits subject to prescribed conditions. The exemption will be effective from April 1, 2026.
The government’s decision comes at a time when the Indian rupee has faced pressure from rising crude oil prices, geopolitical uncertainty in the Middle East and sustained foreign fund outflows. The currency has weakened significantly this year, prompting policymakers to explore measures that can attract stable long-term capital into the economy.
Previously, foreign investors were subject to a 12.5% long-term capital gains tax on listed bonds and a 20% withholding tax on interest income from government securities. Market experts have argued that these taxes reduced the attractiveness of Indian debt instruments compared to those of several competing emerging markets.
Analysts believe the latest tax relief could significantly improve post-tax returns for global investors and encourage greater allocations to Indian government bonds. A broader investor base is expected to enhance market liquidity, reduce dependence on domestic buyers and strengthen India’s ability to attract foreign capital during periods of global volatility.
The move is also part of a wider strategy to improve the resilience of India’s financial markets. Alongside the tax changes, policymakers have been considering measures such as easing ownership limits on certain government securities and expanding access for overseas investors. These initiatives are designed to align India’s bond market framework more closely with global standards.
The announcement follows weeks of speculation that the government was preparing incentives to attract foreign investment into debt markets. Reports had indicated that authorities were evaluating multiple options, including reducing withholding taxes and relaxing investment restrictions on select categories of government bonds.
Financial experts say the policy could have long-term benefits beyond supporting the rupee. Increased foreign participation in government securities may help lower borrowing costs, improve price discovery in bond markets and strengthen India’s position as a global investment destination. It could also contribute to the development of a deeper and more diversified fixed-income market.
The decision comes amid heightened focus on India’s macroeconomic stability. The Reserve Bank of India recently maintained its policy repo rate at 5.25% while announcing additional measures to support the currency and manage external risks arising from global geopolitical tensions and higher energy prices.
Market participants are expected to closely monitor the impact of the tax changes in the coming months. If the policy succeeds in attracting substantial foreign investment, it could provide a significant boost to India’s debt market and strengthen the country’s ability to navigate an increasingly uncertain global economic environment.
