India bond tax plan 2026: Cabinet clears relief for FPIs

Why the Centre is revisiting bond taxation

India is weighing tax changes to make government bonds more attractive to foreign portfolio investors (FPIs), as pressure on the rupee and overseas selling of domestic equities keep capital flows in focus. Reports from Reuters, The Economic Times, Bloomberg News and the Times of India indicate the Centre is preparing a package that reduces tax friction for foreign money entering Indian government securities (G-Secs). The stated aim is to boost inflows, support the rupee and ease market pressure.

The proposals come as policymakers seek to mitigate the economic impact of the Iran war and the broader Middle East crisis, according to people familiar with the discussions cited in the reports. The measures under consideration extend beyond a single tax tweak. They cover capital gains treatment, potential changes to withholding tax on interest, and easier market access through changes to bond eligibility under the Fully Accessible Route (FAR).

What the Union Cabinet has approved so far

Reuters, citing an Economic Times report, said the Union Cabinet approved a proposal on Wednesday to remove capital gains tax on foreign portfolio investments in government bonds. Multiple reports also stated that the Cabinet, chaired by Prime Minister Narendra Modi, cleared the promulgation of an ordinance to amend the Income Tax Act to enable the exemption.

The Economic Times was first to report Wednesday’s Cabinet approval, Reuters said. However, it was not immediately clear when the plan will take effect. The steps are expected to be implemented through an ordinance that would amend provisions under the Income Tax Act, followed by a notification after the President gives assent.

The current tax rules FPIs face in listed securities

Under existing rules referenced in the reports, foreign investors pay a 12.5% long-term capital gains (LTCG) tax on listed shares and bonds held for more than 12 months. For government bonds, they also pay a 20% withholding tax on interest income.

The Times of India report added context on how policy has shifted in recent years. It noted that the withholding tax rate had been 5% until July 1, 2023, on income from government securities, state development loans and rupee-denominated bonds. The same set of reports also said the government ended the concessional 5% rate in 2023.

Capital gains tax on G-Secs: proposed removal

The central change under discussion is scrapping capital gains tax on FPIs’ investments in government securities. Reports said the ordinance would amend the Income Tax Act to allow this exemption. This is positioned as a measure to make Indian sovereign debt more competitive from a post-tax return perspective.

If implemented as described, the exemption would specifically target foreign portfolio investments in G-Secs. The reports do not specify whether the change would apply to all maturities or only selected categories, but they consistently frame it around government securities holdings by FPIs.

Interest withholding tax: removal or sharp cut also under consideration

Alongside the capital gains change, people familiar with the matter told Reuters and Bloomberg that the 20% withholding tax on interest earned from government bonds may be removed or significantly reduced. Bloomberg described the government as considering either eliminating the levy or reducing it to a “bare minimum.”

This portion of the package appears to be still under consideration in some reports, unlike the capital gains removal which was described as Cabinet-approved. The Times of India noted that details of the categories of securities covered were not immediately available in its reporting.

Ordinance route and what happens next

The reports indicate the changes would be executed via an ordinance amending the Income Tax Act. A notification is expected after the President gives assent to the ordinance, according to the Economic Times report cited in the supplied text.

While the Cabinet approval is reported as having taken place on Wednesday, Reuters noted uncertainty over the effective date. Investors typically look for clarity on the applicability date, whether the changes are prospective, and whether there are transitional provisions, but those specifics were not included in the reports.

RBI’s Fully Accessible Route (FAR) could widen access

Separately, the Reserve Bank of India is considering steps to increase the pool of government securities that foreign investors can buy without investment limits under the Fully Accessible Route. The supplied text says the RBI is considering designating more long-term government securities under FAR.

Bloomberg’s report also said the RBI is likely to designate some long-tenor sovereign notes as fully accessible. It added that the previous tweak to the FAR list was in 2024, when the central bank removed 14- and 30-year bonds.

Why these steps are being discussed now

The immediate backdrop, as described across the reports, is pressure on the rupee and a need to bolster capital inflows. The government’s broader intent is framed as cushioning the economy from the impact of the Iran conflict and stabilising financial conditions during a period when overseas investors are pulling money out of domestic equities.

In that context, bond inflows can be a stabilising counterweight, particularly when they are directed into sovereign debt. By lowering taxes on both price gains and coupon income, policymakers aim to reduce barriers for global funds evaluating India’s local-currency debt.

Key policy details at a glance

Timeline markers mentioned in reports

Market impact: what changes in the cost of investing

From a market-structure standpoint, the package targets the two taxes that directly reduce bond returns for foreign investors: capital gains tax on the bond price move and withholding tax on interest income. Cutting or removing these levies is designed to lift post-tax returns and make allocation decisions easier for foreign funds comparing India with other emerging-market local bond opportunities.

The FAR expansion angle is also material because it relates to investment limits. By allowing foreign investors to buy designated government securities without caps, FAR reduces operational constraints and can broaden the set of bonds that global funds can hold.

Why the story matters for India’s bond market

The policy direction signals an intent to use tax tools and market-access design to attract overseas capital into sovereign debt. The reporting also ties this approach to currency management goals, with inflows seen as supportive for the rupee during risk-off phases and geopolitical stress.

However, based on the supplied reports, key details are still pending, including the effective date and the final decision on withholding tax. Those specifics will determine how quickly the changes translate into actual portfolio flows.

Conclusion

India is moving toward an ordinance-led change that would scrap capital gains tax for FPIs investing in government securities, with the 20% withholding tax on interest also under review for possible removal or reduction. Parallel discussions on expanding the RBI’s Fully Accessible Route could further lower barriers for foreign investment in long-duration G-Secs. The next concrete milestones flagged in the reports are Presidential assent to the ordinance and the subsequent government notification that would clarify timing and scope.