India is expected to issue an ordinance exempting foreign institutional investors from all taxes on investments in government securities [1].
This move aims to attract more foreign capital into Indian government bonds and deepen the domestic debt market [2]. By removing fiscal barriers, the government seeks to make its sovereign debt more competitive on the global stage.
Under current regulations, foreign investors face a 12.5% long-term capital gains tax on holdings in listed shares and bonds held for more than 12 months [2]. Additionally, there is a 20% withholding tax on interest earned from Indian government bonds [2].
The proposed changes would eliminate these costs entirely. The exemption is intended to cover all taxes, resulting in 0% capital gains and 0% withholding tax for foreign institutional investors holding G-Secs [1].
Government officials said they expect to implement these changes via an ordinance in the near future [1]. This legislative shortcut allows the government to enact the tax relief quickly without waiting for a full parliamentary session.
Foreign institutional investors typically weigh tax efficiency against yield when deciding where to allocate capital. The current tax structure has acted as a deterrent for some large-scale global funds seeking stable returns in emerging markets. By removing these taxes, India positions its government securities as a more attractive asset class for diversified portfolios.
“India is expected to issue an ordinance exempting foreign institutional investors from all taxes on investments in government securities.”
The removal of capital gains and withholding taxes represents a strategic shift to integrate India more deeply into global financial markets. By eliminating the 12.5% capital gains tax and 20% withholding tax, India is attempting to lower the cost of borrowing for the state by incentivizing a surge in foreign inflows. This could lead to increased liquidity in the government securities market and potentially stabilize bond yields, though it relies on the ability of an ordinance to provide long-term certainty for international investors.
