Reduced tax friction may unlock larger mandate-driven bond investments globally.
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The removal of capital gains tax on foreign portfolio investors (FPI) investment in Government Securities and tax exemption on interest earned will boost FPI returns from G-Secs by 15-20 per cent.The move should also ease pressure on the rupee over the medium to longer term.Tax reliefThe government promulgated the Income Tax Amendment Ordinance, 2026, on Friday, scrapping the 12.5 per cent long-term capital gains tax and the 20 per cent withholding tax on interest income for FPIs in government securities from April 1.Reduced tax friction could accelerate India’s inclusion in global bond indices at a higher weight, unlocking systematic index-linked inflows that move on mandate, not sentiment.Global appealRajesh H Gandhi, Partner, Deloitte India, said the Government measures will increase FPIs’ returns from G-sec investments by 15-20 per cent and improve the delta of Indian sovereign bonds compared to other countries.It will also make India’s inclusion in the global bond indices more meaningful since tax was the key hindrance to the same, he added.Kaustubh Gupta, CIO – Fixed Income, Aditya Birla Sun Life AMC, said the RBI has expanded the Fully Accessible Route universe to include 15, 30 and 40-year government bonds against the limit of 30 per cent of outstanding investment.The immediate impact may be limited, but it enables India’s case for inclusion in major global bond indices such as the Bloomberg Aggregate Bond ETF and could facilitate broader settlement access through Euroclear, he said.Basant Bafna, Head – Fixed Income, Mirae Asset Investment Managers, said FPIs see taxation as a direct drag on returns, especially in the background of the recent currency depreciation and elevated global yields.By addressing the taxation aspect, the government has brought the Indian G-Sec market on par with other emerging markets, making it attractive for foreign investors, he said.Dhiraj Relli, MD & CEO, HDFC Securities, said, “In the short-to-medium term, expect a gradual pickup in FPI inflows, easing rupee pressure and lower sovereign borrowing costs as demand rises.”Combined with RBI’s neutral stance and below-target inflation, the setup for debt markets turns constructive, he said.Akshat Garg, AVP Research & Product, Choice Wealth, said the government measures after FPIs turned net sellers up to ₹2.63 lakh crore across Indian markets in 2026, and even the sovereign debt segment, where they currently hold about ₹3.75 lakh crore, has not been insulated from that pressure.The government measures are calibrated toward pension funds, insurance companies and sovereign wealth funds, which have long-duration and low-turnover holders by nature, he added.N ArunaGiri, CEO, TrustLine Holdings, said the much bigger deterrent for foreign investors has been the persistent depreciation of the rupee, which eroded returns despite attractive bond yields.Beyond the tax exemption and FAR expansion, the RBI has also introduced measures aimed at stabilising the currency and improving foreign exchange liquidity, he said.A sustained return of foreign flows into debt markets will lower borrowing costs across the economy, he added.Published on June 5, 2026
