The central government has made a significant move to encourage foreign investment in the nation and reduce the negative economic impacts of the war in Iran. Foreign investors purchasing Indian government bonds will no longer be subject to capital gains tax. According to reports, an ordinance modifying the Income Tax Act has been adopted by the Union Cabinet on 3rd June (Wednesday).
It will totally remove capital gains tax from investments made in Indian government securities (G-secs) by foreign portfolio investors (FPIs) and will be put into effect following presidential approval. To put the revisions into effect, an ordinance amending the Income Tax Act has also been adopted by the cabinet. It is an element of a larger initiative to support the rupee, increase capital inflows and protect the economy from the outcomes of rising crude oil prices and geopolitical unrest.
The decision transpired after Union Finance Minister Nirmala Sitharaman stated that she would be open to hearing from investors about lowering taxes on both short-term and long-term capital gains. She hiked the exemption ceiling for listed equity and equity-linked instruments to Rs 1.25 lakh and elevated the LTCG (long-term capital gains) tax rate on most assets from 10% to 12.5% in the 2024 July Union Budget.
Currently, listed stocks and bonds maintained for more than a year are bound to a 12.5% long-term capital gains tax for foreign investors. Additionally, there is a 20% withholding tax on interest income received from government securities. On the other hand, Section 111A of the Income Tax Act levies a 15% tax on STCG (short-term capital gains) on listed shares in India. In 2023, the government repealed the 5% concessional tax rate that used to be offered to certain investors.
The Reserve Bank of India is also expected to classify some long-duration government assets under the Fully Accessible Route, allowing foreign investors to purchase these bonds without any ownership limits, reported Bloomberg. The central bank removed 14-year and 30-year government bonds from the program in 2024, marking the last change to the list of securities covered by this framework.
The latest action represents one of the biggest tax changes for foreign investors in recent times. More substantial measures to support India’s foreign exchange and draw in foreign investments are probably going to be implemented in the future.
