Foreign Investments in Government Securities Exempted from Capital Gains Tax; Govt Issues Ordinance

New Delhi, June 5: The government exempted foreign investors from income tax on interest earnings and capital gains from government securities as it looked to attract foreign capital to counteract pressure on the rupee.

The government promulgated an ordinance to amend the Income Tax Act to provide tax exemptions on interest income and capital gains arising from sale, exchange or transfer of government securities, effective from April 1, according to a gazette notification dated June 5.

The exemption applies to foreign institutional investors (FIIs) and the Bank for International Settlements (BIS), subject to prescribed information-reporting requirements.

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. They also pay a withholding tax of 20 per cent on interest earned ‌on government bonds.

Meanwhile, the Reserve Bank of India (RBI) on Friday announced a series of measures aimed at attracting foreign capital and strengthening external financing buffers as global uncertainty and elevated energy prices weigh on emerging markets.

The central bank expanded the universe of government securities eligible under the Fully Accessible Route (FAR) by including all new issuances of 15-year, 30-year and 40-year sovereign bonds.

The RBI also removed restrictions on short-term investments, concentration limits and individual security limits for Foreign Portfolio Investors (FPIs) investing through the General Route.

RBI measures, coupled with tax exemptions announced on investments in government securities, are expected to support foreign participation in India’s sovereign debt market and facilitate government borrowing at affordable interest rates.

The move also lends support to rupee, which has weakened more than 6 per cent this year amid rising crude oil prices and foreign portfolio outflows from equities.

The ordinance, signed by President Droupadi Murmu, defines the BIS as the international financial institution established in 1930 and headquartered in Basel, Switzerland. It also refers to the existing statutory definitions of FIIs and government securities under Indian law.

The gazette notification said the ordinance was necessary as Parliament was not in session and immediate action was required, invoking the President’s ordinance-making powers under Article 123 of the Constitution.

The amendment is expected to support foreign participation in India’s government bond market and facilitate investments by international financial institutions.

The RBI also raised investment limits for non-resident Indians (NRIs) and Overseas Citizens of India (OCIs) in listed equity instruments without requiring registration with the securities regulator.

The facility has now been extended to all individual Persons Resident Outside India (PROIs), broadening access to Indian equity markets.

To encourage overseas borrowing, the central bank said it would provide a concessional foreign-exchange swap facility until September 30, 2026, for external commercial borrowings (ECBs) raised by public sector undertakings.

In addition, authorised dealer banks will be eligible for a temporary facility under which the RBI will bear the full hedging cost for fresh three-to five-year Foreign Currency Non-Resident (Bank), or FCNR(B) (Foreign Currency Non-Resident (Bank), deposits mobilised until September 30, 2026.

The measures are aimed at attracting stable foreign capital flows, easing external financing conditions and strengthening India’s balance of payments amid heightened global volatility.

(with inputs from PTI)