The Centre is reportedly considering scrapping capital gains tax on foreign investments in government securities to attract overseas capital and support financial markets.
The proposal may also include removing the 20% withholding tax on interest earned by foreign investors from government bonds.
The move comes amid sustained foreign investor outflows from Indian equities, pressure on the rupee, and efforts to increase India's appeal in global bond markets.
Centre Eyes Tax Break for Foreign Investors to Stem Capital Flight
The Centre is reportedly considering scrapping capital gains tax on foreign investments in government securities as part of a broader effort to attract overseas capital and support the rupee amid persistent market outflows
Summary
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The Centre is preparing to scrap capital gains tax on foreign portfolio investments (FPIs) in government securities in a bid to attract more overseas capital, according to reports citing sources.
Indian financial markets have witnessed sustained foreign capital outflows amid heightened geopolitical uncertainty.
The exodus of foreign portfolio investors has placed significant pressure on the rupee, which emerged as one of the worst-performing major currencies in 2025 and has already depreciated by more than 6% so far this year.
The Economic Times reported on Wednesday that the Cabinet has received the proposal and is awaiting approval. Following the report, India's benchmark 10-year government bond yield rose by one basis point to 7.01% in early trade on Thursday.
According to reports, the proposal originated from the Ministry of Finance and is expected to form part of a broader effort, coordinated with the Reserve Bank of India (RBI), to attract foreign capital inflows.
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The RBI is also expected to announce measures during the June Monetary Policy Committee (MPC) meeting on Friday, the report said.
How Are FPIs Taxed Now?
Foreign investors currently pay a long-term capital gains tax of 12.5% on listed shares and bonds held for more than one year.
According to a Reuters report citing sources, the government is also considering scrapping the 20% withholding tax that foreign investors pay on interest earned from government securities.
Despite broader market volatility and capital outflows, net inflows into India's government debt market have remained positive this year, with FPIs investing around $1.4 billion.
In contrast, foreign investors have withdrawn nearly $28 billion from Indian equity markets so far.
Why Is the Centre Considering the Move?
This is not the first time India has eased investment rules for foreign investors.
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In recent years, the government removed investment limits on select government securities under the Fully Accessible Route (FAR), making it easier for overseas investors to participate in the debt market.
India has been actively competing for global capital as investors increasingly allocate funds to technology-driven markets such as China and South Korea.
Until recently, elevated valuations in Indian equities had also prompted some investors to seek opportunities elsewhere or move funds into traditional safe-haven assets such as gold during periods of geopolitical uncertainty.
The removal of investment limits under the Fully Accessible Route helped India secure inclusion in major global bond indices, including the JPMorgan Emerging Market Bond Index and the Bloomberg Emerging Market Local Currency Bond Index.
India is also awaiting a decision on its inclusion in Bloomberg's widely tracked Global Aggregate Bond Index, a move that could further boost foreign investment in the country's debt market.