Tax Relief on Government Securities May Offer Limited Relief, Experts Say

Government Seeks to Ease Tax Rules for Foreign Investors in Government Securities

The Union Cabinet's approval of an ordinance to ease tax rules for foreign investors in government securities has been met with a positive response from market participants. However, several experts view this move as a limited, sentiment-driven measure rather than a game-changer for foreign inflows.

According to a Times of India report, the Cabinet has cleared an ordinance that removes the 12.5% long-term capital gains (LTCG) tax on gains from Indian government securities (G-Secs) and provides relief on withholding tax on interest income for FPIs. The government is yet to issue an official confirmation.

Market experts believe that the move sends a constructive signal from the government, indicating its willingness to act in response to the ongoing crisis in the currency, current account, and capital account standpoints. However, the actual impact of this move may be modest, as tax is not the primary reason for foreign investment in any market.

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Indian 10-year bond yields currently stand at around 7%, offering a spread of just 2.5% over US yields, one of the narrowest in recent times. This spread does not sufficiently compensate foreign investors for country risk and currency volatility, especially amid rising oil prices, fiscal expansion, and recent pressures on the balance of payments.

Analysts believe that this move is a "band-aid" that provides a sentimentally positive response, but does not make Indian bonds fundamentally attractive from a valuation perspective. To draw meaningful foreign debt inflows, the government may need to follow this move with stronger fundamental triggers, such as higher bond yields or improved macro stability.

The proposed tax relief improves post-tax returns at the margin and may slow down some FPI selling, but few expect a sharp reversal in flows purely on the back of this announcement. Foreign investors have pulled out over Rs 2 lakh crore from Indian equities so far in 2026, while the rupee remains under pressure.

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