Govt Considers RBI Proposal To Cut Taxes On Foreign Investments In Domestic Bonds To Support Rupee

India is considering reducing taxes on foreign investments in domestic bonds to attract more overseas money and support the rupee amid depleting foreign exchange reserves.

The move is being discussed by the Finance Ministry following recommendations from the Reserve Bank of India (RBI), Bloomberg reported.

The government wants to bring India’s tax system for foreign bond investors closer to global standards and make Indian bonds more attractive to international investors.

At present, foreign investors in Indian bonds have to pay short-term and long-term capital gains taxes, depending on tax treaties with their home countries. Interest income earned from bonds is also taxed at nearly 20 percent.

Earlier, overseas investors enjoyed a concessional 5 percent tax rate on bond interest income, but that benefit was removed in 2023.

Discussions around reducing taxes have accelerated as authorities try to prevent the rupee from weakening further.

The Indian currency has been under pressure due to rising crude oil prices, foreign capital outflows, and global uncertainty.

The government has already introduced several measures to reduce pressure on the rupee, including tighter controls on certain trading positions.

However, rising oil prices linked to the conflict involving Iran have increased concerns over India’s import bill and foreign exchange reserves.

The rupee has become one of Asia’s weakest-performing currencies in 2026, declining more than 6 percent against the US dollar so far this year.

Global investors have often complained that India’s tax structure is higher than that of many other emerging markets, including Indonesia, Malaysia, Mexico, and South Africa.

Even though Indian government bonds have been included in major global bond indices such as those managed by JPMorgan and FTSE Russell, foreign ownership in India’s bond market remains low at around 3 percent of the country’s $1.3 trillion bond market.

Experts believe that lower taxes could attract more stable foreign investment into Indian bonds. Increased foreign investment would raise demand for the rupee and help support the currency.