FII Investment in Government Securities May Enjoy Tax Exemption

Government Considers Sweeping Tax Concessions for Foreign Institutional Investors

The Indian government is considering significant tax concessions for foreign institutional investors (FIIs) investing in Indian government securities (G-Secs). According to a report by CNBC-TV18, citing sources, the Centre is exploring the possibility of exempting FII investments in G-Secs from taxes through an ordinance.

The proposed measure includes the removal of the 12.5 per cent long-term capital gains (LTCG) tax on select government securities and the potential elimination of the 20 per cent withholding tax levied on interest income earned from such investments. This move is aimed at attracting overseas capital into India's debt market at a time when the rupee has come under pressure, weakening more than 5 per cent so far this year amid elevated crude oil prices and foreign portfolio outflows from equities.

The easing of the tax burden could improve the attractiveness of Indian sovereign debt for global investors and support capital inflows into the bond market. According to market analysts, the proposal could aid flows at the margin, although it would not be a "magic bullet" in the current environment. In the medium term, however, the measure could have a positive impact.

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India has been taking steps to deepen foreign participation in its bond market over the past few years, including removing investment limits on certain government securities under the Fully Accessible Route (FAR). These reforms helped India secure inclusion in major global bond benchmarks such as the JP Morgan Emerging Market Bond Index and Bloomberg's emerging market local currency bond index.

The latest proposal is also significant as Bloomberg is expected to review India's inclusion in its Global Aggregate Index later this month after deferring a decision in January. Following reports of the proposed tax relief, India's benchmark 10-year government bond yield eased by one basis point to 7.01 per cent in early trade on Thursday.