NEW DELHI: After days of speculation, the government on Friday bit the bullet and announced tax relief for foreign investors. It took the ordinance route to grant exemptions on interest income and capital gains earned from investments in government securities by Foreign Institutional Investors (FIIs). However, no relief was extended to investments in equities. Hours later, the Reserve Bank of India (RBI) unveiled a slew of measures aimed at attracting foreign capital. Together, these steps are expected to support the rupee, which has been under pressure in recent months.
The ordinance amends the Income-tax Act, 2025 to exempt interest earned on government securities, as well as capital gains arising from their sale, exchange or transfer, from income tax for FIIs, subject to the furnishing of prescribed information to tax authorities. It takes effect retrospectively from April 1, 2026.
At present, FIIs or Foreign Portfolio Investors (FPIs) face a 20% withholding tax on interest income earned from Indian debt securities, including government bonds and rupee-denominated bonds. Long-term capital gains on government securities are currently taxed at 12.5%, while short-term capital gains attract a 20% tax.
The tax relief is expected to make government bonds attractive for foreign investors at a time when India is seeking deeper integration with global debt markets.
Rajesh H Gandhi, Partner, Deloitte India, said the tax exemption would increase returns for FPIs investing in Indian government securities by 15-20% and improve the return differential between Indian sovereign bonds and those of other countries, making India more attractive to global investors.
As for the RBI, it expanded the universe of securities eligible under the Fully Accessible Route (FAR) by including all new issuances of 15-year, 30-year and 40-year government bonds. In another significant relaxation, it increased investment limits for Non-Resident Indians (NRIs) and Overseas Citizens of India (OCIs) in listed equity instruments without requiring registration with the Securities and Exchange Board of India. The same facility has now been extended to all Persons Resident Outside India (PROIs) as well.
The central bank also unveiled a scheme under which it will bear the full hedging cost on fresh Foreign Currency Non-Resident [FCNR(B)] deposits with maturities of three to five years mobilised up to September 30. Further, the RBI restored the time limit for the realisation of export proceeds to nine months, so as to supporting exporters and improve foreign exchange inflows.