India is considering abolishing the capital gains tax imposed on foreign portfolio investors holding government bonds, according to a source familiar with the discussions. The potential policy shift comes as authorities seek to increase foreign investment in domestic bonds in response to sustained weakness in the rupee and significant outflows from equity markets.
Removing this tax could make Indian government securities more attractive to international investors, potentially increasing inflows to support the currency. Since the beginning of the year, the rupee has depreciated over 5%, largely due to elevated oil prices and a substantial withdrawal of foreign funds from Indian equities.
Currently, foreign investors pay a 12.5% long-term capital gains tax on listed shares and bonds held for more than a year. The government is also considering eliminating the 20% withholding tax on interest earned from government bonds, the source indicated.
While India’s tax treatment on equity investments aligns with international norms, it remains one of the few markets that taxes non-resident participation in debt instruments. Details of the proposal have not been disclosed publicly, as the decision-making process is ongoing.
Despite foreign investors adding $1.4 billion to Indian government debt holdings since January, Indian equities have seen nearly $28 billion in outflows over the same period.
