India scraps FPI G-Sec capital gains tax in 2026

What the government is planning

India is reportedly preparing to remove capital gains tax on investments in government securities (G-Secs) made by foreign portfolio investors (FPIs). The proposed change is positioned as a way to increase overseas capital inflows at a time when global risk has risen due to the Iran war, according to people familiar with the matter. Multiple reports said the Union Cabinet, chaired by Prime Minister Narendra Modi, approved an ordinance on Wednesday to amend the Income Tax Act to enable the exemption. A notification is expected after the President gives assent to the ordinance. The effective date was not immediately clear in the reports.

Cabinet ordinance route and what happens next

The policy change is expected to be executed through an ordinance that amends provisions under the Income Tax Act. Sources cited in reports said the Cabinet has already cleared the plan, with implementation dependent on Presidential assent. After assent, a formal notification is expected to operationalise the exemption. A Times of India report also said the Cabinet recommended an ordinance to ease tax rules for foreign investors in some categories of securities, moved by the finance ministry, though details were not immediately available. Reuters, citing a source familiar with the matter, said it was not immediately clear when the plan will take effect.

What taxes FPIs pay today on listed securities and bonds

Under the existing framework described 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. On government bonds, they also pay a 20% withholding tax on interest earned. Reports noted that a concessional 5% rate that was previously available to foreign investors was ended by the government in 2023. The proposed move to scrap capital gains tax on FPI investments in G-Secs is intended to change the economics of holding government bonds for overseas investors.

Possible change to the 20% interest withholding tax

In addition to the capital gains exemption, a source cited in Reuters said the 20% withholding tax on interest earned from government bonds may also be removed. Other reports described the government as considering removing, or significantly reducing, the interest withholding tax. However, the reports did not confirm the final structure or the exact scope across categories of government securities. What is clear from the coverage is that the government is weighing tax changes that make Indian government bonds more attractive for FPIs.

Why the move is being considered now

Reports linked the proposal to a broader effort to shore up overseas inflows and protect the economy from external shocks tied to the Iran war. The Economic Times report also framed the plan as part of measures to draw capital flows into India amid pressure on the rupee. One report said the rupee had been under pressure due to global conflicts and had briefly dropped to record lows, without specifying a level. Another data point cited in the provided material was that FPI outflows had reached ₹2.47 lakh crore this year, adding to the context for policy steps aimed at stabilising flows.

What it could mean for India’s bond market access

Apart from tax changes, a separate report referenced a possible operational step from the Reserve Bank of India. According to a Bloomberg report cited in the provided text, the RBI is likely to classify select long-duration government securities under the Fully Accessible Route (FAR). FAR classification allows overseas investors to invest in those bonds without ownership restrictions. The tax and access measures, as described, are aligned around the same goal: making participation in the government bond market easier for FPIs.

Key facts at a glance

Timeline of the reported decision

Market impact: what changes for flows and pricing

For FPIs, scrapping capital gains tax on G-Sec investments can reduce the tax friction associated with holding and exiting government bonds. If the 20% interest withholding tax is also removed or reduced, the post-tax yield comparison versus other sovereign bond markets could improve, based on the tax treatment alone. The reports positioned the package as a response to pressure on the rupee and a desire to attract capital flows while overseas investors were pulling money out of domestic equities. One report cited FPI outflows of ₹2.47 lakh crore this year, underlining why the government may want to improve the relative attractiveness of bond inflows.

Analysis: why an ordinance-based tax change matters

An ordinance route can compress timelines for a policy shift compared with a longer legislative process, but final implementation still hinges on Presidential assent and the subsequent notification. The focus on government securities suggests policymakers are prioritising stable, long-duration inflows that can support the government bond market and, by extension, broader financial conditions. The mention of FAR inclusion for select long-duration securities highlights that market access mechanics and tax treatment are being viewed together. At the same time, several operational details remain unconfirmed in the reports, including the start date and whether the interest withholding change will be fully removed or only reduced.

What to watch next

The next concrete trigger is the President’s assent to the ordinance, followed by the notification that would specify scope and applicability. Investors and market participants will also watch for clarity on whether the 20% withholding tax on interest from government bonds is removed and whether any specific categories of G-Secs are covered first. Separately, any RBI decision to include select long-duration government securities under the Fully Accessible Route would add another channel for increasing foreign participation without ownership limits.