Centre Plans Tax Relief for FPIs Investing in Government Bonds

The Union Cabinet, chaired by Prime Minister Narendra Modi, has reportedly approved an ordinance on Wednesday to amend the Income Tax Act and provide the exemption.

According to a report by The Economic Times, a notification will be issued once the President grants assent to the ordinance.

The report added that additional measures to encourage foreign capital inflows are also under consideration.

At present, foreign investors pay a 12.5 percent long-term capital gains tax on listed shares and bonds held for more than 12 months, along with a 20 percent withholding tax on interest earned from government bonds. The government had withdrawn a concessional 5 percent withholding tax rate for such investors in 2023.

According to the report, the latest decision follows repeated industry requests to reduce long-term capital gains and withholding taxes on government bond investments amid persistent foreign capital outflows.

The government had previously used the ordinance route in 2019 to reduce corporate tax rates in an effort to encourage private investment.

The proposed tax relief comes at a time when foreign portfolio flows have turned negative and the rupee has weakened against the US dollar due to the conflict in West Asia.

Regulators are expected to introduce additional measures to complement the government's efforts to make Indian financial markets more attractive to overseas investors.

So far this year, FPIs have recorded net outflows of Rs 2.47 lakh crore, more than double the Rs 1.04 lakh crore withdrawn in 2025. The rupee touched a record low of 96.965 against the dollar on May 20 before recovering, aided by support from the Reserve Bank of India and easing oil prices following renewed US-Iran peace talks.