𝗜𝗻𝗱𝗶𝗮 𝘁𝗼 𝗥𝗲𝗺𝗼𝘃𝗲 𝗖𝗮𝗽𝗶𝘁𝗮𝗹 𝗚𝗮𝗶𝗻𝘀 𝗧𝗮𝘅 𝗼𝗻 𝗚𝗼𝘃𝗲𝗿𝗻𝗺𝗲𝗻𝘁 𝗦𝗲𝗰𝘂𝗿𝗶𝘁𝗶𝗲𝘀
The Union Cabinet led by Prime Minister Narendra Modi approved an ordinance on Wednesday to amend the Income Tax Act. The change will exempt foreign portfolio investors from capital gains tax on government securities. The ordinance requires Presidential approval before a formal notification takes effect.
Current tax rules for foreign investors include:
- A 12.5% long-term capital gains tax on listed equities and bonds held longer than one year
- A 20% withholding tax on interest income from government securities
- The withdrawal of a 5% concessional rate in 2023
The move aims to stop foreign capital outflows amid the Middle East crisis. Officials seek to protect the economy from the US-Iran conflict and attract greater overseas investment.
Additional measures are expected to increase foreign capital inflows. The Reserve Bank of India is expected to classify select long-duration government securities under the Fully Accessible Route. This would allow overseas investors to buy these bonds without ownership limits. The central bank last revised this list in 2024. It removed 14-year and 30-year government bonds from the program at the time.
Market participants have called for lower taxes on long-term capital gains and interest income from government securities.
Foreign portfolio investment flows have stayed negative this year. Net outflows have reached Rs 2.47 lakh crore. The rupee hit a record low of 96.965 against the US dollar on May 20. The currency remains under pressure from oil prices, US tariffs, and record foreign investor withdrawals. On Wednesday, the rupee closed at 95.71 per dollar. It has fallen more than 6% against the dollar this year.
The yield on the 10-year government bond rose 1 basis point to 7.02%.
The government also plans to allow Persons Resident Outside India to invest in shares of listed Indian companies through the portfolio investment scheme.