India eases tax rules for foreign investors

The Modi Government on Friday exempted foreign investors from income tax on interest earnings and capital gains from Government securities as it looked to attract foreign capital to counteract pressure on the rupee.

The Government promulgated an ordinance to amend the Income Tax Act to provide tax exemptions on interest income and capital gains arising from sale, exchange or transfer of Government securities, effective from April 1, according to a gazette notification dated June 5.

The exemption would be applicable with effect from April 1, that is, the exemption would apply to any interest or capital gains arising to FPIs on or after April 1 in respect of investments in G-Secs, the Finance Ministry said in a statement.

Foreign investors are subject to a long-term capital gains tax of 12.5 per cent on listed shares and bonds held longer than 12 months.

They pay a withholding tax of 20 per cent on interest earned in Government bonds. The Ordinance signed by President Droupadi Murmu defines the BIS as the international financial institution established in 1930 and headquartered in Basel, Switzerland.

It also references existing statutory definitions of FIIs and Government securities under Indian law.

The gazette notification said the ordinance was necessary as Parliament was not in session and immediate action was required, invoking the President’s ordinance-making powers under Article 123 of the Constitution.

In line with the government’s commitment to strengthen India’s position as a leading global investment destination and to deepen the capital market, the Ministry of Finance has another set of measures aimed at enhancing the ease of investment for individual Persons Resident Outside India (PROIs) and FPIs, and to attract stable long-term foreign capital flows.

With the view to enhance participation by Foreign Portfolio Investors (FPIs) in G-sec, it said, the government has decided to expand the list of specified securities under the Fully Accessible Route (FAR) to also include new issuances in government securities in tenors of 15-year, 30-year and 40-year as also Sovereign Green Bonds in the tenors of FAR-eligible securities.

Further, with respect to FPI investments under General Route, it has been decided to remove the three restrictions, viz. short-term investment limit, concentration limit and the security-wise limit for investments by FPIs in G-Secs, while retaining the overall quantitative investment limit of 6 per cent of the outstanding stock of the Central Government securities and 2 per cent of the state government securities (SGSs).

The sub-categories of investment limits, namely, ‘general’ and ‘long-term’ will also be merged into a single limit for investment in Government securities and SGSs, respectively, it said.

These measures will help in development of a smooth yield curve, and attract stable systematic inflow of long-term, patient foreign capital, including long-term investors such as pension funds, insurance companies, and sovereign wealth funds. This is also expected to boost foreign exchange inflows for the country, it added.

Separately, the Reserve Bank of India (RBI) on Friday announced a series of measures aimed at attracting foreign capital and strengthening external financing buffers as global uncertainty and elevated energy prices weigh on emerging markets.

The central bank also ratified the finance ministry announcement by expanding the universe of government securities eligible under the Fully Accessible Route (FAR) by including all new issuances of 15-year, 30-year and 40-year sovereign bonds.

RBI also removed restrictions on short-term investments, concentration limits and individual security limits for FPIs investing through the General Route.

RBI measures coupled with tax exemptions announced on investments in government securities, are expected to support foreign participation in India’s sovereign debt market and facilitate government borrowing at affordable interest rates.

The move also lends support to rupee which has weakened more than 6 per cent this year, squeezed by higher oil prices and foreign portfolio outflows in equities.

In line with Budget 2026-27 announcement an individual Persons Resident Outside India (PROI) have been permitted to invest in equity instruments of listed Indian companies through the Portfolio Investment Scheme which was hitherto available only to NRIs/OCIs.

The investment limit has been increased for an individual PROI under this scheme from 5 per cent to 10 per cent in any company, with an overall investment limit for all individual PROIs to 24 per cent, from the current 10 per cent, it said.

This notification will facilitate a more proactive mobilisation of foreign portfolio capital by leveraging the existing onboarding systems, it said.

“Simplified onboarding and reduced compliance requirements would further enhance ease of doing business, while attracting a broader base of relatively stable individual foreign investors. This will also support greater and more stable foreign inflows into Indian equity markets,” it said.

To encourage overseas borrowing, the RBI said it would provide a concessional foreign-exchange swap facility until September 30, 2026, for external commercial borrowings (ECBs) raised by public sector undertakings.

In addition, authorised dealer banks will be eligible for a temporary facility under which the RBI will bear the full hedging cost for fresh 3-5 years Foreign Currency Non-Resident (Bank) deposits mobilised until September 30, 2026.

The measures are aimed at attracting stable foreign capital flows, easing external financing conditions and strengthening India’s balance of payments amid heightened global volatility.