Government Announces Removal of Tax on Government Securities for Foreign Institutional Investors to Stimulate Foreign Capital Inflows

Government Removes Long-Term Capital Gains Tax on Foreign Investments in Government Securities

In a bid to attract foreign inflows, the government has announced the removal of long-term capital gains tax on investments made by foreign institutional investors (FIIs) in government securities. This decision comes at a time when foreign investors have pulled out a massive ₹2.6 lakh crore from equities so far this year, putting pressure on the Indian rupee.

The outflows have already crossed the ₹1.66 lakh crore withdrawn in the entire 2025 due to geopolitical tension. However, foreign investors have invested over ₹17,000 crore in the debt market through the Fully Accessible Route (FAR). They withdrew about ₹4,000 crore under the general debt limit and ₹340 crore through the Voluntary Retention Route (VRR) so far this year, according to a PTI report.

Currently, FIIs are required to pay Long Term Capital Gains (LTCG) tax of 12.5% on their gains from investment in equity and debt investments. The rupee slide has prompted the government to step up its efforts to cap the downside in the domestic unit. The domestic currency has been depreciating by several factors, including US trade tariffs, record foreign fund outflows, and a rising import bill, putting pressure on the country's fiscal.

Read also: Rising Tuition Fees in Foreign Countries Exceed Rs 2 Crore in Many Destinations

The rupee has depreciated about 7% so far in 2026 and is down roughly 6% since the outbreak of the Iran conflict on February 28. The government's decision to remove the tax friction on government securities for FPIs is expected to provide a boost to the debt market.

Separately, the Reserve Bank of India permitted some long-tenor sovereign notes as fully accessible, allowing overseas investors to buy them without limits. The previous tweak to the list of government securities available under this route was in 2024, when the central bank removed 14-year and 30-year bonds.