Tax Exemption Drives FPI Inflows Of Nearly Rs 35,000 Crore Into Government Bonds In June

Foreign portfolio investors (FPIs) have invested nearly Rs 35,000 crore in Indian government bonds so far in June after the government exempted them from income tax on interest income and capital gains arising from investments in specified government securities.

FPI Investments Rise In June

According to data from the Clearing Corporation of India (CCIL), all the inflows were directed towards government securities under the Fully Accessible Route (FAR).

The FAR framework allows non-resident investors to invest in specified Government of India dated securities without any investment ceilings.

The increase in investments follows an ordinance issued by the government on June 5, amending the Income Tax Act. The amendment provides tax exemption on interest income and capital gains arising from the sale, exchange or transfer of eligible government securities held by FPIs.

The exemption is applicable retrospectively from April 1, 2025.

Holdings In FAR Securities Increase

CCIL data has shown that FPI holdings in FAR securities rose to Rs 3.58 lakh crore on Tuesday from Rs 3.23 lakh crore on June 3.

The latest inflows were significantly higher than those seen in the previous two months. FPIs invested Rs 5,512.11 crore in May and Rs 5,262.02 crore in April. In March, however, they recorded net outflows of Rs 17,687.99 crore from the debt market.

The government had introduced the tax exemption through an ordinance as part of changes to the taxation framework for foreign investors holding eligible government securities.

RBI Announces Additional Measures

Alongside the tax changes, the Reserve Bank of India (RBI) announced measures in its June monetary policy review to expand foreign investor access to government securities.

The central bank included all new issuances of 15-year, 30-year and 40-year government securities under the FAR framework.

It also removed restrictions relating to short-term investments, concentration limits, and individual security limits for FPI investments made through the General Route.

Currently, foreign investors are subject to a long-term capital gains tax of 12.5 per cent on listed shares and bonds held for more than 12 months. Interest earned on government bonds is also subject to a withholding tax of 20 per cent.

The government and the RBI have cited these policy changes while outlining measures related to foreign participation in the government securities market.

The latest CCIL data indicates that foreign investors increased their holdings of FAR securities during June, following the announcement of the tax exemption and regulatory changes.