India Scraps Capital Gains Tax to Woo Foreign Investors

India has enacted a significant policy change by eliminating capital gains tax on government securities for foreign portfolio investors (FPIs). This strategic move, approved via an ordinance to amend the Income Tax Act, is designed to invigorate overseas capital inflows into the nation. The government seeks to bolster the economy by making Indian markets more attractive to foreign investment.

This decision comes at a critical juncture, with FPIs having recorded substantial outflows exceeding Rs 2.47 lakh crore in the current calendar year. The weakening of the rupee against the dollar further underscores the urgency of these measures. The tax exemption is expected to help stabilize financial markets and encourage sustained foreign investment.

Previously, foreign investors faced a 12.5% long-term capital gains tax on listed securities and bonds held over 12 months, along with a 20% withholding tax on government bond interest. These rates were higher than the previously available concessional rates, prompting market participants to advocate for reductions. Regulators anticipate further measures to enhance India's appeal for foreign capital.