India scrapped long-term capital gains tax (LTCG) and withholding tax on interest earned on government securities held by foreign portfolio investors (FPIs), looking to reverse capital outflows and bolster the rupee, which has taken a beating this year. Moves by the Centre and RBI on Friday saw the currency make sharp gains.Foreign investors were subject to LTCG tax of 12.5% on listed shares and bonds held longer than 12 months, and withholding tax of 20% on interest earned on government securities (G-secs). The government had raised LTCG tax rate on most assets to 12.5% from 10% in the July 2024 budget.The government promulgated an ordinance to amend the Income Tax Act, scrapping capital gains tax on the sale, exchange and transfer of G-secs as well as withholding tax on interest earned, effective April 1, according to a June 5 gazette notification.Separately, it also eased rules for residents outside the country, including foreigners and overseas entities, to invest in listed Indian stocks and permitted foreign portfolio investors (FPIs) to park funds easily in sovereign green bonds and certain long-tenor government securities. The exemption will apply to any interest or capital gains accruing on or after April 1 for investments in G-Secs, the finance ministry said in a statement.The ordinance follows foreign portfolio investors exiting India and the rupee weakening sharply against the dollar amid the West Asia conflict. FPIs have exited to the tune of a net ₹2.47 lakh crore so far this year, more than double the ₹1.04 lakh crore they withdrew in calendar 2025, pulling down the rupee by as much as 6% in the period.The move will increase returns for FPIs from investment in Indian G-Secs by 15-20 % and improve the delta between returns on investment in Indian sovereign bonds compared to other countries, thereby making India a bit more attractive, said Deloitte India partner Rajesh H Gandhi.Price Waterhouse & Co LLP partner Nehal Sampat said removal of this friction may also assist in the inclusion of government securities in global bond indices in a bigger way, which could eventually trigger more inflows into India.The gazette notification stated the ordinance was necessary as parliament was not in session and immediate action was required.The ordinance also specifically exempts investments by Basel-headquartered Bank for International Settlements from LTCG and withholding tax on interest income on investments in G-Secs. BIS, regarded as the central bank of central banks globally, had stayed away from Indian sovereign debt due to the levy of tax. A government official told ET that the exemption could mean investments to the tune of $7-11 billion in government paper by BIS.