India bond tax relief: cabinet to weigh 20% cut in 2026

Policy push to attract overseas capital

India is preparing a fresh set of measures to attract overseas capital into its debt market, according to a Bloomberg News report citing people familiar with the matter. The proposals include tax relief for foreign investors and steps to make it easier to buy certain government bonds. People cited in the report said the Union Cabinet could consider the proposals as early as this week. The policy discussion comes amid currency pressure and a broader effort to align India’s framework with global norms for bond-market access. While the details are still private, the measures under consideration point to a coordinated approach between the government and the Reserve Bank of India (RBI). The reported changes would affect how foreign portfolio investors (FPIs) evaluate after-tax returns on rupee bonds. For bond markets, even small changes to withholding tax and eligibility can materially change demand from global funds.

What the Union Cabinet is expected to consider

The report said the cabinet on Wednesday is expected to consider a significant cut in the taxes paid by global funds investing in Indian bonds. People familiar with the deliberations said the government is weighing whether to eliminate the existing 20% levy on interest earned from bonds by overseas investors. Another option is to reduce the levy to a bare minimum, rather than remove it entirely. The proposals, if approved, would directly lower the tax burden on interest income, improving net yields for foreign investors. The discussion is framed as part of a broader push to make Indian debt more competitive versus other global fixed-income destinations. Officials have not publicly confirmed the exact structure or timing in the information provided, and the cabinet’s decision process remains ongoing. Still, the repeated references to cabinet-level consideration indicate the measures are being treated as a near-term policy action.

The withholding tax debate: 20% to 5% or near-zero

Multiple reports referenced a possible reduction of the withholding tax on bond interest from 20% to 5% to attract foreign investors. That said, the Bloomberg-linked discussion described two main pathways: full removal of the 20% tax, or a substantial reduction. The difference between a modest cut and a near-elimination matters because foreign funds typically compare post-tax returns across markets after accounting for currency risk and hedging costs. A large reduction could make Indian government bonds more attractive on a net basis, especially for long-duration strategies that depend on predictable interest income. However, one expert view cited alongside the reports cautioned that tax cuts alone may not be sufficient to reverse outflows or deliver meaningful inflows into debt markets. That assessment reflects the reality that foreign participation also depends on global risk sentiment, domestic liquidity, and currency stability. The government’s intent, as described, is to bring India’s tax structure closer to global standards and encourage stronger participation in the domestic bond market.

RBI’s Fully Accessible Route (FAR) may expand

Separately, the RBI is likely to expand the list of government securities available under the Fully Accessible Route (FAR), Bloomberg News reported. The proposed change would allow foreign investors to purchase certain long-duration sovereign bonds without any investment limits. The FAR framework is a key access channel because it directly determines which government securities are open to foreign buying without caps. The RBI last revised the FAR list in 2024, when it excluded 14-year and 30-year government securities. The latest proposal, as described, would designate some long-tenor sovereign notes as fully accessible again, removing ownership limits entirely for those bonds. This matters because long-duration bonds are often preferred by global funds that want duration exposure and benchmark-like positioning. Wider eligibility under FAR can also help deepen liquidity in specific maturities if foreign participation rises.

What is driving the policy urgency

The reports linked the policy push to pressure on the rupee and a desire to attract steadier foreign inflows. One account noted that capital outflows have erased nearly $18 billion from India’s foreign exchange reserves since tensions in West Asia escalated. The same set of reports cited rising oil prices, global uncertainty, and foreign capital outflows as factors increasing currency pressure. Against that backdrop, policymakers appear focused on measures that could support the rupee by improving demand for rupee assets. The Bloomberg report also said the RBI had earlier recommended reducing taxes on foreign bond investors, and that the finance ministry was seriously considering the move. The reference to a central bank recommendation suggests the policy is not solely a fiscal initiative but part of a broader macro-stability effort. In practical terms, lower taxes and wider bond access are among the faster policy levers available to try to influence portfolio flows.

How foreign investors could respond

For overseas investors, the immediate impact of any tax relief would be an improvement in after-tax carry from Indian bonds. If ownership caps are also removed on select long-tenor securities under FAR, investors would face fewer operational constraints when building positions. That combination can make India more attractive for global bond funds that allocate based on index eligibility, liquidity, and policy certainty. At the same time, investors will still weigh currency risk, including the cost of hedging the rupee. The reports also suggest that the success of the policy will depend on the extent of tax relief and any associated limits. If the final decision is a partial cut rather than elimination, the impact may be smaller but still meaningful for yield-sensitive strategies. The broader message is that authorities are trying to reduce structural frictions that keep foreign participation below potential.

Early market signals: yields eased on the headlines

One report noted that after news of the potential tax cut, the benchmark 10-year government bond yield fell by 2 basis points to 7.03%. That move is a small but clear signal of how quickly bond markets can react to expectations of stronger demand. Lower yields generally indicate higher bond prices, which can be driven by the prospect of additional buyers, including foreign funds. While a 2-basis-point move does not confirm sustained inflows, it shows the market is sensitive to policy headlines around foreign participation. The yield response also reflects the importance of tax policy in fixed-income pricing, where net returns drive allocation decisions. Investors will likely watch follow-through carefully, including whether the cabinet decision is matched by RBI execution on FAR eligibility. For now, the price action described remains tied to expectations rather than confirmed changes.

Key facts mentioned in the reports

What to watch next

The first trigger is whether the cabinet formally takes up and approves the tax proposal this week, as suggested by people familiar with the matter. Investors will also watch for clarity on the final tax rate, including whether the 20% levy is removed entirely or reduced to a minimal level. On the RBI side, markets will look for an announcement expanding the FAR list and specifying which long-tenor securities are covered. The sequencing matters because foreign participation can respond faster when both tax treatment and eligibility are clarified simultaneously. Another point to monitor is whether additional measures, such as those referenced in some reports, are bundled into the final package. Until official notifications are released, market participants are likely to treat the information as directional rather than definitive. Still, the repeated reporting around cabinet consideration and RBI involvement indicates active policy momentum.

Conclusion

India is preparing measures that could reduce withholding tax on foreign bond investors and widen access to select government securities through the FAR framework. The proposals, expected to be considered by the cabinet as early as this week, are framed as a way to attract overseas capital and support the rupee. The next concrete step is formal approval and implementation details from the government and the RBI, which will determine how quickly foreign funds can adjust allocations.