Govt exempts foreign investors from capital gains tax on G-Sec investments

The Centre said on Friday that it would exempt foreign institutional investors and the Bank for International Settlements from capital gains tax on income earned from investments in 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 by over 5 per cent this year amid elevated oil prices and equity outflows.

Bond markets and the rupee were little changed after the announcement.

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

Under the changes, interest income and capital gains arising from the sale, transfer, exchange or redemption of specified government securities held by eligible foreign investors and the Bank for International Settlements (BIS) will be exempt from tax, subject to prescribed disclosure and reporting requirements.

The exemption will take effect from April 1, 2026, the government said, adding that the move is aimed at improving post-tax returns for overseas investors in Indian sovereign debt and broadening the investor base for government securities.

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

The move comes amid sustained foreign portfolio outflows from Indian equities and mounting pressure on the rupee. Foreign investors have pulled out about ₹2.6 trillion from equities so far in 2026, exceeding the ₹1.66 trillion withdrawn in the whole of 2025, according to exchange data. In the first three days of June alone, overseas investors withdrew nearly ₹34,000 crore from equities.

The rupee has emerged as one of the worst-performing emerging market currencies this year, pressured by elevated crude oil prices, geopolitical tensions in West Asia, persistent capital outflows and a strong US dollar. The currency has depreciated about 7 per cent so far in 2026 and touched a record closing low of 96.86 against the dollar on May 20.

Analysts said the tax exemption could improve post-tax returns for foreign investors in Indian sovereign debt and help attract longer-term capital inflows.