In a bid to stem foreign capital outflow amid the Middle East crisis, the government is looking to do away with capital gains tax on foreign portfolio investors’ holdings in government securities. The move will be part of efforts to attract greater overseas investment. The government is looking to cushion the economy from the impact of the ongoing Iran conflict.Reports suggest that PM Narendra Modi-led Union Cabinet on Wednesday cleared an ordinance that will amend the Income Tax Act and enable the proposed tax exemption. Once the ordinance receives the President’s approval, a formal notification is expected to be issued shortly thereafter.At present, foreign investors are required to pay a 12.5% long-term capital gains tax on listed equities and bonds held for more than a year. In addition, interest income earned from government securities is subject to a 20% withholding tax. The concessional tax rate of 5% that was previously available to such investors was withdrawn by the government in 2023.
Several steps to attract foreign capital
The government is also likely to unveil additional steps aimed at boosting foreign capital inflows.In a separate move, the Reserve Bank of India is likely to classify select long-duration government securities under the Fully Accessible Route, enabling overseas investors to invest in these bonds without any ownership restrictions, a Bloomberg report suggests. The last revision to the list of securities eligible under this framework came in 2024, when the central bank excluded 14-year and 30-year government bonds from the programme. Against the backdrop of persistent foreign capital outflows from India, market participants have been advocating a reduction in both the long-term capital gains tax and the withholding tax levied on interest income from government securities.The proposed measure comes at a time when foreign portfolio investment flows have remained in negative territory and the rupee has come under significant pressure against the US dollar amid the ongoing conflict in West Asia.So far in the current calendar year, net FPI outflows have reached Rs 2.47 lakh crore, more than twice the Rs 1.04 lakh crore withdrawn during calendar year 2025. The rupee touched a record low of 96.965 against the dollar on May 20 before recovering some ground, aided by increased intervention from the Reserve Bank of India and softer crude oil prices following renewed efforts by the US and Iran to pursue peace negotiations.
Rupee’s unprecedented fall
The rupee’s fall to unprecedented levels has led policymakers to intensify measures aimed at limiting further depreciation. In response to rising oil import expenses, Prime Minister Narendra Modi has urged citizens to help conserve foreign exchange reserves. A combination of factors has weighed on the currency, including US tariff measures, record foreign investor withdrawals, and the oil price shock triggered by the Iran conflict, all of which have added pressure to the country’s financial position. After touching a historic low of 96.9650 against the dollar on May 20, the rupee has recovered some of its losses. The rebound has been supported by stronger intervention from the central bank and a moderation in oil prices following renewed diplomatic efforts between the US and Iran. Even so, the rupee remains the second weakest-performing currency in Asia this year, having declined by more than 6% against the dollar.On Wednesday, the currency settled at 95.71 per dollar, marking a decline of 0.5% for the day. Meanwhile, the yield on the benchmark 10-year government bond edged up by 1 basis point to 7.02%.The government may also announce a proposal allowing Persons Resident Outside India (PROIs) to invest in shares of listed Indian companies through the portfolio investment scheme.