India scraps tax on foreign investors in government bonds to support rupee

India said on Friday it would exempt foreign institutional investors and the Bank for International Settlements from tax on interest income and capital gains arising from investments in government securities. The move is aimed at attracting more stable foreign capital as the rupee faces pressure from higher oil prices and equity outflows.

The measure was introduced through the Income-tax (Amendment) Ordinance, 2026, promulgated by President Droupadi Murmu while Parliament is not in session. The ordinance amends the Income-tax Act, 2025 and is deemed to have taken effect from April 1, 2026.

Under the changes, interest earned on government securities and capital gains from their sale, exchange or transfer will be exempt from tax for eligible foreign institutional investors and the Bank for International Settlements. The exemption is subject to the prescribed information being submitted to tax authorities.

The rupee and bond markets were little changed after the announcement, which had been widely expected. Reuters reported that the rupee has weakened by more than 5% this year amid elevated oil prices and capital outflows from equities.

Before the change, foreign investors were subject to a 12.5% long-term capital gains tax on listed shares and bonds held for more than 12 months, as well as a 20% withholding tax on interest earned from government bonds.

Analysts said the exemption could improve post-tax returns for overseas investors and encourage greater participation in Indian government securities. A broader foreign investor base could also help cushion external pressures on India’s financial markets and support the rupee.

Source: Reuters