Indian Economy: The removal of the tax on bond investments by FPIs will encourage foreign investment in the Indian bond market. This will also reduce pressure on the rupee and strengthen it.

The government may reduce tax on bond investments.

Capital Gains Tax: Amid continuing concerns about the economy and in a major move aimed at attracting foreign investment, the government has decided to remove the capital gains tax on foreign investors investing in Indian government bonds. Sources told India Today that the proposal was approved by the Union Cabinet on Wednesday.

This approval is part of a broader effort to boost capital inflows, strengthen the rupee, and insulate the economy from the impact of the ongoing war in Iran and high crude oil prices. The Cabinet also approved an ordinance amending the Income Tax Act to implement these changes. This decision will come into effect after receiving presidential assent.

This move comes at a time when India is grappling with record foreign investor outflows, pressure on the rupee, and rising energy costs due to the protracted conflict in West Asia. According to reports, the RBI had recommended the government reduce taxes on foreign bond investments.

What are the rules now?

Under current regulations, foreign investors are required to pay both short-term and long-term taxes on bond investments in India. Holding bonds for more than 12 months attracts a 12.5% ​​long-term capital gains tax. Selling bonds within less than 12 months incurs a hefty short-term capital gains tax, ranging from 30-40%, depending on the category.

Now, following the ordinance, this capital gains tax on government securities will be completely zero. Previously, foreign investors were required to pay a 20% withholding tax on interest earned. The government is now working on a package to reduce or even halve this 20% tax. This is why many foreign investors have avoided the Indian bond market.

Impact on the economy and the rupee

Due to the US-Iran war and global uncertainty, Indian markets have seen selling worth ₹2.47 lakh crore so far this year. This has pushed the rupee to a low of 96.96. The removal of the tax could lead to large global funds (sovereign wealth funds and pension funds) investing between $10 billion and $30 billion (₹80,000 crore and ₹2.5 lakh crore) annually in India's debt market. When foreign investors invest dollars in the market to purchase Indian bonds, the dollar inflow will strengthen, and this is expected to strengthen the rupee.

fall in bond yields

The massive purchases will lower the yield (interest rate) on Indian government bonds. A fall in bond yields means the government will have to pay less interest to borrow, which will also reduce the fiscal deficit.