India scraps capital gains tax on foreign investors in government debt to support Indian rupee

NEW DELHI: India said on Friday it would exempt foreign institutional investors and the Bank for International Settlements from capital gains tax on receipts arising from interest or sale of government securities.

The decision, announced through an executive order as Parliament is not in session, is aimed at attracting more stable foreign capital as the rupee has weakened over 5% this year amid elevated oil prices and equity outflows.

Bond markets and the rupee were little changed after the announcement, which had been expected.

The Income-tax (Amendment) Ordinance, 2026, promulgated by President Droupadi Murmu, amends Schedule IV of the Income-tax Act, 2025, to add new categories of exempt income linked to investments in government bonds.

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Under the changes, interest earned on government securities and capital gains from their sale, exchange or transfer will be exempt from tax for specified entities, subject to conditions including the furnishing of prescribed information to tax authorities.

The exemption will take effect from April 1, 2026, the government statement said.

Foreign investors are subject to a 12.5% long-term capital gains tax on listed shares and bonds held for more than 12 months, and a 20% withholding tax on interest earned from government bonds.

Analysts said the exemption could improve post-tax returns for overseas investors and support greater participation in Indian government securities, helping broaden the investor base and cushion external pressures.