India Scraps Long-Term Capital Gains Tax On Foreign Investors In Govt Bonds

New Delhi: In a major move aimed at attracting foreign capital and strengthening India's debt markets, the Centre scrapped long-term capital gains tax (LTCG) on investments made by foreign institutional investors (FIIs) in government securities through an Ordinance approved by the Union Cabinet.

The decision, cleared by the Cabinet chaired by Prime Minister Narendra Modi, seeks to make Indian government bonds more attractive to overseas investors at a time when global markets are grappling with rising crude oil prices, geopolitical tensions and heightened uncertainty.

The Ordinance amends provisions of the Income Tax Act to exempt foreign investors from long-term capital gains tax on investments in government securities. Currently, foreign investors are required to pay 12.5 per cent LTCG tax on listed equities and bonds held for more than one year. Interest earned on government securities is also subject to a 20 per cent withholding tax.

According to an Economic Times report, government officials said the tax relief is expected to improve the attractiveness of Indian debt instruments and encourage greater participation by global investors in the country's bond market.

The tax exemption comes alongside a fresh set of measures announced by Reserve Bank of India Governor Sanjay Malhotra during Friday's monetary policy announcement to further boost foreign portfolio investment (FPI) in government securities.

Among the key measures, the RBI has expanded the Fully Accessible Route (FAR) framework to include newly issued 15-year, 30-year and 40-year government bonds, allowing overseas investors greater access to long-term sovereign debt.

The central bank also announced an increase in investment limits for Non-Resident Indians (NRIs) and Overseas Citizens of India (OCIs) in Indian equity markets without requiring registration with the Securities and Exchange Board of India (SEBI).

Malhotra said the same facility is proposed to be extended to all individual Persons Resident Outside India (PROIs), placing them on par with NRIs and OCIs for investment purposes.

The policy measures were announced as the RBI's Monetary Policy Committee (MPC) unanimously decided to keep the benchmark repo rate under the Liquidity Adjustment Facility (LAF) unchanged at 5.25 per cent following an assessment of domestic and global economic conditions.

The RBI also retained the Standing Deposit Facility (SDF) rate at 5 per cent, while the Marginal Standing Facility (MSF) rate and Bank Rate remain unchanged at 5.50 per cent. The MPC maintained its neutral policy stance.