Govt plans to remove capital gains tax on FPI investments in G-Secs: Report

India is reportedly set to remove capital gains tax on investments in government securities (G-Secs) by foreign portfolio investors (FPIs). This move is aimed to boost overseas capital inflows and protect the economy from the effects of the Iran war, according to sources familiar with the matter.

The Union Cabinet, led by Prime Minister Narendra Modi, approved an ordinance on Wednesday to amend the Income Tax Act and allow this exemption. According to a report in The Economic Times, a notification will follow once the President gives assent to the ordinance. Additional steps to encourage capital flows are also expected.

Currently, foreign investors pay a 12.5% long-term capital gains tax on listed shares and bonds held for over 12 months, along with a 20% withholding tax on interest from government bonds. The government had removed a concessional 5% withholding tax rate for these investors in 2023.

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The report added that the decision comes after ongoing industry requests to reduce LTCG and withholding taxes on government bond investments amid continued foreign capital outflows. The government had used the ordinance route in 2019 to cut corporate tax rates to encourage private investment.

The tax relief is announced as foreign portfolio flows have turned negative and the rupee has weakened against the dollar due to the West Asia conflict. Regulators are expected to introduce further measures to support the government's efforts to make Indian markets more appealing to overseas investors.

So far this year, FPIs have recorded net outflows of ₹2.47 lakh crore, more than double the ₹1.04 lakh crore withdrawn in 2025. The rupee hit a record low of 96.965 against the dollar on May 20 before recovering, helped by support from the Reserve Bank of India and easing oil prices following renewed US-Iran peace talks.