Capital gains tax scrapped: What FPIs get in 2026

What changed and why it matters

India is preparing a fresh set of measures to attract overseas capital into its government bond market, according to multiple media reports. The key proposal is to scrap capital gains tax on foreign portfolio investors (FPIs) investing in government securities, alongside possible changes to the tax on interest income. The reports frame the move as an attempt to make India’s debt market more attractive to global funds and improve foreign inflows.

A related theme running through the reports is pressure on the currency and broader global uncertainty linked to the West Asia conflict. With markets watching the Reserve Bank of India (RBI) closely, the policy mix now includes both fiscal steps (tax changes) and market-access steps (bond eligibility under the Fully Accessible Route).

Cabinet approval and the ordinance route

The Economic Times reported that a Cabinet meeting on Wednesday approved scrapping the capital gains tax for foreign portfolio investment in government bonds. The same report said the decision is likely to be implemented through an ordinance amending income tax rules.

If notified, the change would remove a key tax friction faced by overseas investors trading sovereign debt. While the report highlights the Cabinet approval, it also suggests the market is waiting for the formal legal mechanism and execution timeline.

What FPIs pay today: capital gains and interest taxes

As per the information cited in the reports, foreign investors currently pay a 12.5% long-term capital gains (LTCG) tax on listed shares and bonds held for more than 12 months. In the context of government debt investments, reports also describe a 12.5% LTCG levy on holdings beyond 12 months.

Separately, FPIs pay a 20% withholding tax on interest earned in government bonds. Some reports say this interest tax may be removed, while others indicate authorities are weighing a significant reduction. One report also mentions discussion around cutting the withholding tax rate from 20% back down to 5%.

Bond market reaction: 10-year yield eases

Bond yields softened after the initial headlines. On June 4, benchmark 10-year government bond yields slipped at the open following reports that the government may eliminate capital gains taxes for foreign investors trading sovereign debt.

The 10-year yield was trading at 7.0143% after closing the previous session at 7.0248%. Separately, another report described the 10-year government bond yield falling by as much as five basis points to 7% before recovering some ground.

Rupee and broader market cues

The reports also point to a supportive move in the rupee and risk sentiment after the tax-cut headlines. One market update noted the rupee bounced back from record lows after media reports that the finance ministry was weighing significant tax reductions for foreign investors in bonds.

In the same stream of updates, it was reported that the rupee appreciated by 34 paise to 95.60 after the news. Equity sentiment also improved in that window, with one report noting the Sensex rising by nearly 1,000 points and the Nifty reclaiming 24,750, reflecting how currency and bond-market measures can affect wider risk appetite.

RBI policy next: June 5 MPC decision in focus

Attention is also on the RBI’s monetary policy committee (MPC) review concluding on June 5. A Moneycontrol poll cited in the material said the MPC is expected to hold the repo rate at 5.25%, although a growing minority of market participants expect a 25 basis point hike.

The RBI may also update inflation and growth forecasts for FY27, given broader uncertainty arising from the West Asia conflict. The reports also reiterate the RBI’s policy reaction function: if inflation rises above the RBI’s 4% target, the central bank can raise interest rates to bring inflation down by reducing credit.

Wider bond access: Fully Accessible Route (FAR)

Alongside tax changes, Bloomberg reported the RBI is likely to expand the list of government securities available under the Fully Accessible Route (FAR). Under FAR, foreign investors can purchase designated government bonds without investment limits, removing ownership caps.

The reports say the RBI last revised the FAR framework in 2024, with changes involving 14-year and 30-year government securities. The broader direction suggested is to make certain long-tenor sovereign bonds fully accessible to overseas investors to deepen demand.

Why policymakers are considering these measures

A key driver cited is the need to stabilise foreign flows and reduce stress in external balances during periods of global volatility. One report said capital outflows have erased nearly $18 billion from India’s foreign exchange reserves since tensions in West Asia escalated, adding urgency to measures that can attract more stable, longer-duration capital.

Officials have not publicly confirmed the proposals in the cited reports. However, the same coverage notes that the RBI has earlier recommended reducing taxes on foreign bond investors, and deliberations have reportedly gathered pace as authorities try to curb the rupee’s depreciation.

What market participants say could bring larger inflows

Beyond tax relief, some market participants also highlighted flow catalysts such as special deposit schemes and global bond index inclusion. In the provided transcript, one view was that a step similar to the 2013 FCNR deposit announcement could help attract dollar flows.

The same commentary also referenced discussions with an index provider such as Bloomberg about adding Indian government bonds to a global aggregate bond index, with an estimate that index inclusion could attract $10-25 billion of flows. The speaker further suggested a broader objective of attracting a pool of $10-100 billion using multiple measures, while also expecting rate hikes to be “gradual and disciplined” in the range of 50-75 basis points in that view.

Key facts at a glance

What to watch next

The immediate next step is clarity on implementation, since the Cabinet-approved decision is reported to be routed via an ordinance amending income tax rules. Markets will also track whether the interest withholding tax is removed, reduced, or left unchanged, as that directly affects post-tax bond returns for overseas investors.

Separately, investors will watch the RBI’s June 5 policy outcome, any changes to FY27 inflation and growth forecasts, and whether the RBI expands FAR eligibility for long-tenor bonds. Together, these actions shape both the attractiveness of Indian sovereign debt and the durability of foreign participation.