India plans to scrap capital gains tax on FPI investments in government securities

By

, ET BureauLast Updated: Jun 04, 2026, 06:21:00 AM IST

Synopsis

India is set to eliminate capital gains tax for foreign portfolio investors on government securities to boost overseas capital inflows. This move, approved via an ordinance, aims to counter economic impacts from the Iran war and address negative foreign portfolio flows and rupee depreciation. Further measures are anticipated to enhance market attractiveness for foreign investment.

New Delhi: India is set to scrap capital gains tax on investments in government securities by foreign portfolio investors (FPIs) in an effort to shore up overseas capital inflows into the country as the Centre seeks to mitigate the effects of the Iran war on the economy, said people familiar with the matter.

The Cabinet, in a meeting chaired by Prime Minister Narendra Modi on Wednesday, approved the promulgation of an ordinance to amend the Income Tax Act to pave the way for this exemption, the people said. A notification is expected soon after the President gives her assent to the ordinance.

More measures are expected to encourage capital flows.

Foreign investors are currently subject to 12.5% long-term capital gains (LTCG) tax on listed shares and bonds held for more than 12 months. They also pay a 20% withholding tax on interest earned from government bonds. The government had ended the concessional 5% rate available to them in 2023.

Agencies

Industry Demand

The government had used the ordinance route in 2019 to cut the corporate tax rate to encourage private investment.

Market participants have been urging a reduction in LTCG tax and withholding tax on interest earned on government bonds amid sustained capital flows out of India.

The latest move comes in the backdrop of foreign portfolio flows turning negative and the rupee weakening sharply against the dollar with the West Asia conflict continuing.

Regulators are expected to initiate further measures to complement the government's efforts to make the Indian markets attractive for foreign capital, said one of the persons cited above.

In the calendar year so far, exits by FPIs add up to a net Rs 2.47 lakh crore, more than double the Rs 1.04 lakh crore they pulled out in calendar 2025. The rupee hit an all-time low of 96.965 to the dollar on May 20 but has since rebounded as the Reserve Bank of India has stepped up support and oil prices eased after renewed US-Iran peace efforts.

(With inputs from Anuradha Shukla & Jatin Takkar)

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