BT Explainer: How FII tax relief and RBI reforms could bring ₹3.81 lakh crore to India
The Centre's decision to exempt foreign investors from taxes on government securities, along with a series of RBI measures to attract overseas capital, could potentially bring more than $40 billion (around ₹3.81 lakh crore) into India. SBI Research believes the reforms could strengthen the rupee, deepen bond markets and boost long-term foreign participation in the economy.
- Jun 5, 2026,
- Updated Jun 5, 2026 5:54 PM IST
India has unveiled one of its most significant foreign capital attraction packages in recent years, combining tax incentives, bond market reforms and foreign currency deposit measures to make the country more attractive to global investors.
According to SBI Research, the combined impact of the Centre's latest tax relief measures and the Reserve Bank of India's reforms could potentially attract at least $40 billion (approximately ₹3.81 lakh crore at an exchange rate of ₹95.24 per dollar) in foreign capital inflows. The report also suggests that stronger inflows could help the rupee appreciate toward the 92-93 per dollar range.
What has changed
The Centre has issued an ordinance exempting interest income and capital gains earned by Foreign Institutional Investors (FIIs) on investments in government securities from income tax.
The ordinance, which takes effect retrospectively from April 1, 2026, removes two major tax costs faced by foreign investors:
12.5% long-term capital gains tax (LTCG) on government bonds held for more than 12 months. 20% withholding tax on interest income earned from government securities.
The exemption has also been extended to the Bank for International Settlements (BIS).
According to the Finance Ministry, the objective is to attract durable, long-term foreign capital from pension funds, sovereign wealth funds and insurance companies while making Indian markets more competitive globally.
How much could foreign investors save?
SBI Research estimates that foreign investors could gain:
₹4,000-5,000 crore from exemption on interest income. ₹500-1,000 crore from capital gains tax exemption.
Together, these tax savings substantially improve post-tax returns on Indian government securities, making them more attractive compared to competing global debt markets.
Government bonds to global investors
The tax relief has been accompanied by important RBI measures aimed at increasing foreign participation in India's debt market.
The central bank has brought new 15-year, 30-year and 40-year government securities under the Fully Accessible Route (FAR), allowing foreign investors unrestricted access to these bonds. SBI Research believes this could increase demand for long-term government securities, improve liquidity and lower government borrowing costs.
The report notes that foreign investors currently utilise only a small portion of available FAR limits, leaving substantial room for additional inflows.
ECB and FCNR(B) measures
The RBI has also introduced concessional forex swap facilities to encourage External Commercial Borrowings (ECBs) by public sector enterprises.
This could help government-owned companies access cheaper overseas funding while increasing foreign currency inflows into the country.
Another significant step relates to Foreign Currency Non-Resident (Bank) [FCNR(B)] deposits. With the RBI bearing hedging costs and offering temporary regulatory relaxations, banks may be able to offer more attractive returns to NRIs.
SBI Research believes FCNR(B) deposits could potentially attract inflows exceeding the $34 billion mobilised during the 2013 FCNR(B) drive.
Why does this matter for India?
The measures come at a time when global capital flows remain volatile due to geopolitical tensions, inflation concerns and slowing growth across several major economies.
By reducing tax costs, expanding bond market access and encouraging foreign currency inflows, India is attempting to strengthen its external sector, improve liquidity and attract long-term investors rather than short-term speculative capital.
What about interest rates?
Despite raising its FY27 inflation forecast to 5.1% and cutting GDP growth estimates to 6.6%, SBI Research believes the RBI is likely to prioritise growth concerns and maintain a pause in the August monetary policy review rather than begin an aggressive rate-hiking cycle.
If SBI's projections materialise, the combination of tax exemptions and RBI reforms could emerge as one of India's largest foreign capital attraction initiatives in recent years, potentially bringing ₹3.81 lakh crore into the country while supporting the rupee and government bond market.
India has unveiled one of its most significant foreign capital attraction packages in recent years, combining tax incentives, bond market reforms and foreign currency deposit measures to make the country more attractive to global investors.
According to SBI Research, the combined impact of the Centre's latest tax relief measures and the Reserve Bank of India's reforms could potentially attract at least $40 billion (approximately ₹3.81 lakh crore at an exchange rate of ₹95.24 per dollar) in foreign capital inflows. The report also suggests that stronger inflows could help the rupee appreciate toward the 92-93 per dollar range.
What has changed
The Centre has issued an ordinance exempting interest income and capital gains earned by Foreign Institutional Investors (FIIs) on investments in government securities from income tax.
The ordinance, which takes effect retrospectively from April 1, 2026, removes two major tax costs faced by foreign investors:
12.5% long-term capital gains tax (LTCG) on government bonds held for more than 12 months. 20% withholding tax on interest income earned from government securities.
The exemption has also been extended to the Bank for International Settlements (BIS).
According to the Finance Ministry, the objective is to attract durable, long-term foreign capital from pension funds, sovereign wealth funds and insurance companies while making Indian markets more competitive globally.
How much could foreign investors save?
SBI Research estimates that foreign investors could gain:
₹4,000-5,000 crore from exemption on interest income. ₹500-1,000 crore from capital gains tax exemption.
Together, these tax savings substantially improve post-tax returns on Indian government securities, making them more attractive compared to competing global debt markets.
Government bonds to global investors
The tax relief has been accompanied by important RBI measures aimed at increasing foreign participation in India's debt market.
The central bank has brought new 15-year, 30-year and 40-year government securities under the Fully Accessible Route (FAR), allowing foreign investors unrestricted access to these bonds. SBI Research believes this could increase demand for long-term government securities, improve liquidity and lower government borrowing costs.
The report notes that foreign investors currently utilise only a small portion of available FAR limits, leaving substantial room for additional inflows.
ECB and FCNR(B) measures
The RBI has also introduced concessional forex swap facilities to encourage External Commercial Borrowings (ECBs) by public sector enterprises.
This could help government-owned companies access cheaper overseas funding while increasing foreign currency inflows into the country.
Another significant step relates to Foreign Currency Non-Resident (Bank) [FCNR(B)] deposits. With the RBI bearing hedging costs and offering temporary regulatory relaxations, banks may be able to offer more attractive returns to NRIs.
SBI Research believes FCNR(B) deposits could potentially attract inflows exceeding the $34 billion mobilised during the 2013 FCNR(B) drive.
Why does this matter for India?
The measures come at a time when global capital flows remain volatile due to geopolitical tensions, inflation concerns and slowing growth across several major economies.
By reducing tax costs, expanding bond market access and encouraging foreign currency inflows, India is attempting to strengthen its external sector, improve liquidity and attract long-term investors rather than short-term speculative capital.
What about interest rates?
Despite raising its FY27 inflation forecast to 5.1% and cutting GDP growth estimates to 6.6%, SBI Research believes the RBI is likely to prioritise growth concerns and maintain a pause in the August monetary policy review rather than begin an aggressive rate-hiking cycle.
If SBI's projections materialise, the combination of tax exemptions and RBI reforms could emerge as one of India's largest foreign capital attraction initiatives in recent years, potentially bringing ₹3.81 lakh crore into the country while supporting the rupee and government bond market.