(Image source from: Ndtv.com)
The national government has made an important move to encourage investment from abroad and lessen the negative impact of the Iran conflict on the nation's economy, as reported by insiders. Led by Prime Minister Narendra Modi, the Union Cabinet is said to have accepted a new rule changing the Income Tax Act. This rule, according to sources, will entirely remove the capital gains tax for foreign portfolio investors (FPIs) who invest in Indian government bonds (G-secs). It will take effect once it receives the President's approval. At present, foreign investors are subject to a 12.5 percent long-term capital gains (LTCG) tax on bonds and publicly traded stocks they hold for over 12 months. Additionally, they also incur a 20 percent withholding tax on the interest earned from government bonds. Notably, the government removed the 5 percent reduced tax rate on this in 2023. However, this year, foreign investors have withdrawn a significant Rs 2.5 lakh crore from the Indian stock market. Therefore, there have been demands for tax reductions to stop more selling from foreign institutional investors (FIIs) and FPIs.
As per sources, more significant actions to strengthen India's foreign exchange and attract international investments may be planned for the future. This decision follows comments from Union Finance Minister Nirmala Sitharaman, who expressed her willingness to hear from investors regarding tax reductions on both long-term and short-term capital gains. In the Union Budget released in July 2024, the finance minister increased the LTCG tax rate on most assets to 12.5 percent from 10 percent, while raising the exemption threshold for listed stocks and related instruments to Rs 1.25 lakh. At the same time, short-term capital gains (STCG) from publicly traded shares in India are taxed at 15 percent, according to Section 111A of the Income Tax Act. Harsha Vardhana VM, Group CEO of Atom Financial Services, stated that the figures are too significant to ignore. "FPIs were net sellers in India during eight out of twelve months in 2025, leading to total outflows of Rs 1,66,286 crore. In January 2026, there was a Rs 33,598 crore exit, marking the largest monthly outflow since August 2025. The LTCG tax is a factor, but it is just one part of a larger equation. "
"The tax situation does the most harm not to equity funds, which can adjust for the 12.5 percent tax, but rather to tax-exempt groups such as sovereign wealth funds and pension funds that incur India's LTCG as a straightforward added expense with no tax benefits in their home country. For these investors, India becomes more costly than similar markets," Vardhana noted. Similarly, Gaurav Maheshwari, Chief Financial Officer of Alankit Limited, mentioned that India stands out because many leading global financial hubs like Singapore and Hong Kong generally do not charge capital gains tax on foreign portfolio investors. "However, India maintains that income from Indian assets should help fund the country's tax revenue, regardless of the investor's origin," Maheshwari elaborated.
