Centre Removes Capital Gains and Interest Tax on FII Investment in Govt Bonds to Attract Foreign Funds

June 5, 2026

New Delhi: In a significant move aimed at strengthening foreign capital inflows and easing pressure on the balance of payments, the Centre has scrapped capital gains tax as well as withholding tax on Foreign Institutional Investor (FII) investments in government bonds, according to official sources.

The decision comes amid concerns over a widening BoP deficit and sustained pressure on the rupee, which policymakers hope to stabilize through improved overseas participation in debt markets.

Move Aimed at Boosting Bond Market Participation

The tax exemption is expected to make Indian government securities more attractive to global investors by improving post-tax returns. At present, FIIs are subject to capital gains tax on bond investments and withholding tax on interest earnings, which has reduced their competitiveness compared to other emerging markets.

Officials believe the removal of these levies will help deepen participation in government bonds and support long-term stable inflows into India’s debt market.

RBI and Policy Push for Capital Inflows

The decision aligns with broader policy efforts by the Reserve Bank of India (RBI) and the government to attract foreign funds and stabilize currency volatility. The RBI has been taking measures to strengthen the external sector while maintaining its focus on inflation management and growth stability.

Market participants say the combined policy push could improve investor sentiment and support rupee stability in the near term.

BoP Concerns Drive Policy Action

The move also comes against the backdrop of an estimated balance of payments (BoP) deficit, which is expected to exert pressure on external accounts. Policymakers are increasingly focusing on attracting durable capital inflows to bridge the gap and reduce volatility in financial markets.

Experts say while the measure may not lead to immediate large inflows, it improves India’s long-term positioning as an attractive destination for sovereign debt investment.