India has taken a major step to deepen its sovereign debt market by abolishing the long-term capital gains tax (LTCG) on foreign portfolio investments in government securities. The cabinet approved the measure, and it is set to be implemented through an ordinance amending income tax rules, according to reports from the Economic Times.
Previously, foreign investors holding Indian government bonds for more than 12 months were subject to a 12.5% LTCG on price gains. The government may also remove the 20% withholding tax on interest earned from these bonds, significantly improving post-tax returns. The policy shift was officially announced over the weekend by the finance ministry, catching some market participants off guard.
The immediate market reaction was subdued, with the Indian rupee trading in a narrow range against the US dollar. Traders attributed the flat performance to persistent global dollar strength, rising crude oil prices, and likely intervention by the Reserve Bank of India to prevent sharp currency appreciation. "The tax removal is structurally positive for bond inflows, but the immediate impact on the rupee is limited," said a currency trader at a private bank in Mumbai. "We need to see sustained foreign flows over the next few weeks for the rupee to gain meaningful traction."
In the bond market, the 10-year benchmark yield edged lower as investors priced in higher future demand. Foreign portfolio investors have already been net buyers of Indian debt, with inflows of $1.4 billion this year, contrasting sharply with nearly $28 billion pulled from equities. Analysts project the tax change could attract an additional $5–10 billion in the coming months, especially as Indian bonds are part of global indices like JPMorgan’s GBI-EM. This would help finance the current account deficit and potentially lend medium-term support to the rupee.
The final details—whether the exemption covers existing holdings, all government securities, and the treatment of interest withholding tax—remain to be clarified in the forthcoming ordinance.
