The Indian government has eliminated several taxes on government bonds for foreign investors to attract more global capital into its markets [1], [2].
These reforms are designed to facilitate the inclusion of Indian government bonds in global bond indices. By lowering the cost of entry and increasing returns for international funds, the government aims to boost foreign inflows and stabilize the domestic bond market [1].
Under the new measures, the government removed the 20% withholding tax on interest income for foreign investors [1]. Additionally, the 12.5% long-term capital gains tax on government bonds has been eliminated [1]. This move effectively reduces both tax burdens to 0% for eligible international participants [1].
Beyond tax exemptions, the government expanded the pool of long-term government securities available for foreign investment [1], [2]. This expansion provides global investors with a wider variety of assets to choose from, increasing the liquidity and appeal of the Indian market.
Officials said these changes are expected to result in foreign inflows of up to $11 billion [1]. The push for index inclusion is a strategic effort to integrate India more deeply into the global financial system, a move that could lower borrowing costs for the state over the long term.
These changes were implemented in 2026 as part of a broader push to modernize India's financial infrastructure [1], [2].
“The government removed the 20% withholding tax on interest income for foreign investors.”
By removing tax barriers and expanding available securities, India is positioning itself as a more competitive destination for institutional investors. Inclusion in global bond indices typically triggers automatic buying from passive funds, which would provide the Indian government with a more diversified and stable source of funding for its infrastructure and development projects.
