Key Highlights
- The Indian rupee gained around 50 paise against the US dollar following the government’s tax relief announcement.
- India has removed capital gains tax on government securities held by FIIs and the Bank for International Settlements (BIS).
- The tax exemption also extends to interest income earned on eligible government bonds.
- The ordinance became effective from April 1, 2026, subject to reporting requirements.
- The RBI expanded the list of government securities eligible under the Fully Accessible Route (FAR).
- Restrictions on foreign portfolio investors (FPIs), including short-term investment and concentration limits, have been eased.
- Experts believe the combined measures could boost foreign inflows, strengthen forex reserves, and lower government borrowing costs over time.
The Indian rupee posted a strong recovery during trading on June 5 after the Government of India announced the removal of capital gains tax on investments in government securities made by foreign institutional investors (FIIs). The policy move, designed to attract overseas capital and improve investor sentiment, comes at a time when the domestic currency has been facing significant pressure from rising crude oil prices and sustained foreign capital outflows.
The rupee climbed to an intraday high of 95.245 against the US dollar, recovering sharply from its previous close of 95.74. The gain helped the currency halt a three-day losing streak and offered temporary relief after months of weakness. The rupee has been among the worst-performing major currencies this year, declining more than 6% on a year-to-date basis amid elevated global uncertainty and concerns over India’s external balance.
According to an ordinance issued by the government on June 5, foreign investors and the Bank for International Settlements (BIS) will no longer be required to pay capital gains tax on investments in Indian government securities. The exemption is effective from April 1, 2026. In addition, interest income earned on these securities will also be exempt from taxation, provided investors comply with specified reporting requirements.
Prior to the policy change, foreign investors were subject to a 12.5% long-term capital gains tax on listed bonds held for more than one year. They were also required to pay a 20% withholding tax on interest income generated from government securities. Market participants believe the removal of these taxes significantly enhances the attractiveness of Indian sovereign debt for global investors seeking higher yields in emerging markets.
The tax reforms were announced alongside a series of measures introduced by the Reserve Bank of India (RBI) to encourage foreign participation in the domestic debt market. The central bank expanded the scope of the Fully Accessible Route (FAR) by including all newly issued 15-year, 30-year, and 40-year government bonds. Under the FAR framework, eligible government securities can be purchased by non-resident investors without investment caps.
In another significant step, the RBI relaxed several restrictions applicable to foreign portfolio investors (FPIs) investing through the General Route. These changes include the removal of limits on short-term investments, concentration restrictions, and individual security caps. The measures are intended to simplify market access and improve the flexibility available to overseas investors.
The policy initiatives come against a challenging backdrop for the Indian economy. Rising crude oil prices have increased concerns over the country’s import bill, current account deficit (CAD), and balance of payments (BOP) position. Simultaneously, geopolitical tensions in the Middle East have contributed to volatility in global financial markets, prompting foreign investors to reduce exposure to emerging market assets, including Indian equities.
Economists and market analysts view the government’s tax relief and the RBI’s regulatory easing as coordinated efforts to attract long-term foreign capital and strengthen India’s external sector resilience. Increased foreign participation in government securities could support demand for the rupee, improve foreign exchange reserves, and reduce borrowing costs for the government over time.
Dhawal Dalal, President and Chief Investment Officer – Fixed Income at Edelweiss Mutual Fund, noted that the combined measures announced by the government and the RBI are likely to have a positive impact on investor confidence and capital inflows. He added that stronger foreign investment could support India’s foreign exchange reserves in the medium term, although rising inflation expectations may eventually lead to a gradual increase in policy rates.
Market participants will now closely monitor the response of global investors to the new tax regime and regulatory changes. If foreign inflows accelerate in the coming months, the measures could provide meaningful support to the rupee and contribute to greater stability across India’s financial markets.
