Indian economy (AI image)With an aim to attract foreign capital, the government on Friday promulgated an ordinance to exempt capital gains tax on investments made by Foreign Institutional Investors in government securities, according to a PTI report.The move is aimed at making Indian debt markets more attractive to overseas investors while helping shield the economy from the effects of the continuing Iran conflict.The Union Cabinet, chaired by Prime Minister Narendra Modi, approved an ordinance on Wednesday to amend the Income Tax Act and facilitate the proposed exemption.Currently, foreign investors are subject to a 12.5% long-term capital gains tax on listed equities and bonds held for more than one year. Interest earned on government securities is also taxed through a 20% withholding levy. A concessional 5% tax rate that was previously available to foreign investors was withdrawn in 2023.The government is also expected to introduce further initiatives designed to encourage overseas capital inflows.The proposals come against a backdrop of sustained foreign fund outflows, with market participants repeatedly calling for lower long-term capital gains tax rates and reduced withholding taxes on interest income from government securities.The timing is significant, as foreign portfolio investment flows have remained negative while the rupee has faced considerable pressure against the US dollar amid the continuing conflict in West Asia.Since the start of the current calendar year, net FPI outflows have reached Rs 2.47 lakh crore, more than double the Rs 1.04 lakh crore withdrawn during calendar year 2025.The rupee had weakened to a record low of 96.965 against the dollar on May 20 before recovering partially. The recovery was aided by RBI intervention and softer crude oil prices following renewed diplomatic efforts between the US and Iran.This story is being updated