Centre Scraps Taxes on FII Investments in Government Bonds

6 Jun 2026

Recently, the Union Government abolished capital gains tax and withholding tax on investments by Foreign Institutional Investors’ (FIIs)in Indian government securities.

About Foreign Institutional Investors (FIIs)

FIIs are foreign entities such as mutual funds, pension funds, insurance companies, sovereign wealth funds, and asset management companies that invest in a country’s financial markets.
Investment Avenues: They invest in equities, government securities (G-Secs), corporate bonds, and other marketable securities.
Nature of Investment: FIIs make portfolio investments and do not seek management control over the entities in which they invest.
Economic Significance: They provide capital inflows, enhance market liquidity, deepen financial markets, and support economic growth.

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Key Announcements

Capital Gains Tax Exemption: Both long-term (12.5%) and short-term (30%) capital gains tax on FII investments in government bonds have been abolished.
- Capital Gains Tax (CGT) is the tax levied on the profit earned from the sale or transfer of a capital asset such as land, buildings, mutual funds, bonds, etc.
Interest Income Relief: The withholding tax of about 20% on interest income from government securities has been removed.
- Withholding tax is a mechanism used by tax authorities to collect tax on certain payments, such as wages or interest, before the recipient receives the funds.
Implementation Timeline: The tax changes will take effect from 1 April 2026 through an ordinance amending the Income Tax Act, 2025.
Wider Beneficiary Coverage: The exemption applies to FIIs as well as the Bank for International Settlements (BIS).

Reasons For the Decision

Addressing BoP Pressures: To help bridge the projected Balance of Payments deficit of $50–60 billion in 2026–27.
Supporting the Rupee: To reduce depreciation pressures on the Indian currency amid global uncertainties.
Attracting Foreign Capital: To encourage greater foreign participation in India’s government debt market.
Improving Global Competitiveness: To remove tax-related frictions that made Indian bonds less attractive than those of competing economies.

About Balance of Payments (BoP)

Meaning: BoP records all economic transactions between residents of a country and the rest of the world.
BoP Deficit: Occurs when foreign exchange outflows exceed inflows.
Economic Impact: Persistent deficits can weaken the domestic currency and reduce foreign exchange reserves.

Complementary RBI Measures

Expansion of FAR Universe: All new 15-, 30-, and 40-year government bond issuances have been included under the Fully Accessible Route (FAR).
- Fully Accessible Route (FAR): It was introduced by the Reserve Bank of India in 2020.
- It allows non-resident investors to invest in specified Government of India securities without any investment limits or quotas.
- FAR-designated securities are exempt from the usual foreign portfolio investment (FPI) caps applicable to government bonds.
Removal of Investment Restrictions: Limits on short-term investments, investor concentration, and individual securities under the General Route have been withdrawn.

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Key Economic Benefits of the Decision

Attracts Large Foreign Capital: Expected to bring in $45–50 billion of foreign inflows over the next two years.
Strengthens Government Bond Market: Enhances India’s integration with global sovereign debt markets and increases demand for government securities.
Lowers Borrowing Costs: Higher demand for bonds can reduce yields, thereby lowering government borrowing costs.
Supports External Sector Stability: Helps finance the Current Account Deficit (CAD) and provides a stable source of foreign capital during periods of weak FDI and equity inflows.
Improves Rupee Stability: Increased foreign exchange inflows can support the rupee and strengthen foreign exchange reserves.
Enhances Macroeconomic Resilience: Diversifies capital sources, reduces dependence on equity inflows, and strengthens resilience against external shocks and global financial volatility.
Makes FAR Securities More Attractive: Tax exemption improves the attractiveness of Fully Accessible Route (FAR) government securities for global investors.