Budget 2026: Tax booster for foreign portfolio investors being discussed

Amidst a weakening rupee and weaning interest from foreign investors, the government is considering measures, including some kind of tax relief for foreign portfolio investors as a possible sweetener to boost sentiments. According to sources, discussions are underway on this, and a move to this effect could be announced in the Union Budget 2026-27.

According to sources, options under consideration include extending the capital gains tax exemption available to sovereign funds to designated pension and endowment funds.

At present, eligible sovereign wealth funds and pension funds can avail 100% tax exemption for specified infrastructure-related income. Certain funds and their wholly-owned subsidiaries are also eligible for tax exemptions on income from dividends, interest as well as long-term capital gains tax.

Another possibility could be resetting the rate applicable to FPIs from 12.5% back to 10%. Significantly, Budget 2025-26 proposed increasing the long-term capital gains tax rate to 12.5% from 10% on non-residents, including foreign investors, effective April 1, 2026. It would have to be seen if the government chooses to review its own decision.

Market participants have been expecting some relief measures from the government, and sources indicated that there has been some discussion on this in the finance ministry.

FPIs have sold over $18 billion of shares in 2025, which was a record high due to concerns over geopolitical and external risks.

However, sources pointed out that much of the subdued sentiment is due to the uncertain external environment, including the 50% tariff on Indian exports by the US. The rupee too has sharply depreciated against the US dollar and fell by over 4% in 2025, and breached the 90 mark against the US dollar.

“Tax measures can only do so much for sentiment. There have been discussions and representations on the issue of giving tax relief to foreign investors, but there are several factors at play, which have led to the subdued sentiments of foreign investors and rupee fall,” noted a source close to the development.