Summary of this article
Govt approved proposal to exempt FPIs from capital gains tax in government securities to boost inflows
Decision comes amid persistent weakness in rupee and continued heavy FPI outflows
Details on rollout and implementation are still awaited
Amid pressure on the rupee and sustained foreign portfolio investor (FPI) outflows, the government has decided to relax tax rules for overseas investors by removing capital gains tax on certain government securities.
The Union Cabinet on June 4 approved a proposal to exempt FPIs from capital gains tax on investments in government securities. The decision, taken in a Cabinet meeting chaired by Prime Minister Narendra Modi, is aimed at making these investments more attractive for foreign investors and bringing more flows into the domestic debt market.
Under the existing framework, foreign investors are liable to pay 12.5 per cent Long Term Capital Gains (LTCG) tax on listed shares and bonds held for more than 12 months. The proposed exemption will apply specifically to government securities, while other instruments will remain under the current tax structure.
Following the development, the benchmark 10-year government bond yield eased by a percentage point to 6.98 per cent.
The decision comes at a time when the rupee has faced immense pressure in recent sessions. Rupee has depreciated by almost 6 per cent on a year-to-date (YTD) basis against the dollar. The currency, after briefly strengthening to around 95 against the dollar over the last week, has weakened again. The USD/INR pair surged up to about 95.83 before easing slightly on June 4. As of 12:10 PM, it was trading at 95.62, down 0.08 per cent from its previous close, indicating a marginal recovery during the day.
Foreign investor outflows have been a pain point for India’s securities markets. FPIs have sold Indian equities worth Rs 2.59 lakh crore so far in 2026. This follows a net sell-off of Rs 1.66 lakh crore in 2025.
The tax exemption is expected to help attract more foreign investors to government securities and increase overall investment coming into the market. Investors often consider taxes while deciding where to invest their money in emerging markets like India.
The decision also shows the government’s focus on supporting steady inflows at a time when currency volatility and continued selling by FPIs have affected market sentiment.
More details on how and when the exemption will be implemented are expected soon. Investors will be looking for clarity on the timeline and whether more steps are planned to support foreign investment.
