India Considers Potential Reversal of Government Securities Tax Break for Foreign Investors
Government Approves Ordinance to Attract Foreign Portfolio Investors
The government has approved promulgating an ordinance to exempt foreign portfolio investors (FPIs) from long-term capital gains tax on government securities and to remove the 20 percent withholding tax on interest income earned from such investments. This move is aimed at attracting more foreign portfolio inflows and arresting the rupee's depreciation.
In the first five months of 2026, the Indian currency has weakened about 7 percent against the dollar. Foreign investors withdrew a net $415 million from debt securities this financial year, according to NSDL data. Inflows under the fully accessible route (FAR) stood at $705 million as of June 3. FAR bonds are designated government securities that the Reserve Bank of India has opened to foreign investors without any investment caps.
The withholding tax structure for foreign investors involves a levy of 20 percent on interest income earned by FPIs on government securities (G-secs) and rupee-denominated bonds. However, G-secs listed on the International Financial Services Centre (IFSC) stock exchange attract a concessional rate of 4 percent for bonds listed prior to July 1, 2023. For the listing post this period, the withholding tax rate is 9 percent.
| Country | Withholding Tax Rate on Interest Income from G-secs |
|---|---|
| India (pre-July 1, 2023) | 5% |
| India (post-July 1, 2023) | 9% |
| US, UK, and Singapore (DTAA) | 15% |
Additionally, Double Taxation Avoidance Agreements (DTAAs) provide a lower tax rate for their home-country investors who buy Indian G-secs. To claim the lower tax rate, the investor needs to furnish a valid tax residency certificate (TRC). The DTAA rates override the 20 percent withholding tax rate.
The capital gains tax structure for FPIs involves a levy of 12.5 percent on long-term capital gains (LTCG) from select G-secs (included in FAR). The LTCG rate kicks in if the bond is held for more than 12 months.
| Investment Type | FAR Eligibility |
|---|---|
| 5-year sovereign bonds | Eligible |
| 7-year sovereign bonds | Eligible |
| 10-year sovereign bonds | Eligible |
| 14-year G-Secs | Excluded |
| 30-year G-Secs | Excluded |
Read also: Concerns Raised at Parliamentary Panel Meeting Over Rupee and Sluggish Private Investment
The FAR mechanism was introduced in April 2020 to remove quantitative investment caps by FPIs on specific securities. The FAR structure allows Indian G-Secs to be included under the JP Morgan Government Bond Index-Emerging Markets (GBI-EM) in March 2025, and the Bloomberg Emerging Market Local Currency Government Index in October 2025.
Investor Takeaway
The Indian government may exempt foreign portfolio investors from long-term capital gains tax on government securities, potentially attracting more foreign portfolio inflows.
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