India removes capital gains tax on foreign bond investments

The Indian government has approved a plan to eliminate capital gains tax for foreign portfolio investors on their investments in government securities, a significant policy shift aimed at attracting overseas capital and supporting the rupee. The Union Cabinet cleared the proposal, which will be implemented through an ordinance amending the Income Tax Act.

The move would remove the 12.5% long-term capital gains tax applied to profits from government bonds held for more than 12 months. Officials are also considering addressing the 20% withholding tax on interest income earned from these securities, with proposals ranging from a substantial reduction to a complete removal of the levy. The changes are intended to align India's tax treatment of foreign bond investors with global standards, as the country is currently among the few that tax non-resident flows into debt.

This policy initiative comes amid significant economic pressures. Foreign portfolio investors have withdrawn substantial capital from Indian equity markets this year, contributing to volatility. The rupee has faced depreciation pressure, touching a record low against the U.S. dollar in May, influenced by higher global...