India to Eliminate Capital Gains Taxes on Investments Made by Foreign Investors in Government Bonds

As per the sources, the Central Government of India has taken a major action to encourage foreign capital inflows and reduce the harmful effects of the Iran war on the Indian economy. The nation is planning to eliminate capital gains tax on investments made by foreign portfolio investors (FPIs) in Indian government securities (G-secs).

The move will be officially implemented after presidential approval. The Union Cabinet, headed by Prime Minister Narendra Modi, is satisfied to amend the Income Tax Act.

Presently, 12.5% long-term capital gains (LTCG) tax is required to be paid by foreign investors on bonds and listed shares kept for over 12 months. Along with this, they also pay 20% withholding tax on interest earned on government bonds.

Previously, in 2023, the government had removed a 5% concessional rate on this. However, this year, 2026, it has been noticed that the foreign portfolio investors have sold approximately Rs 2.5 lakh crore worth of Indian equities, setting a record in Indian history for foreign fund outflows. Consequently, to avoid further FII (foreign institutional investors) and FPI selling, the government has received recommendations for tax reduction.

This decision has been followed by what Union Finance Minister Nirmala Sitharaman said a few days back: that she would like to hear the investors on what they have to say about cutting taxes on LTCGs and STCGs.

The Union Budget presented in July 2024 had raised the long-term capital gain (LTCG) tax rate on most assets from 10% to 12.5% and had also hiked the exemption limit for listed equity and equity-linked instruments to 12.5 lakh. Meanwhile, under Section 111A of the Income Tax Act, the short-term capital gains (STCG) tax rate on listed shares in India remained taxed at 15%.