Context:
The Government of India has promulgated an ordinance waiving the 12.5% Long-Term Capital Gains tax on Foreign Institutional Investor investments in government bonds. The exemption will take effect from April 1, 2026, aiming to make Indian government securities more attractive to overseas investors.
Explanation:
- Foreign Institutional Investors / Foreign Portfolio Investors invest in Indian financial assets such as equities, bonds and government securities.
- Government Securities / G-Secs are debt instruments issued by the Central or State governments to borrow money from the market.
- Long-Term Capital Gains tax is imposed on profits earned from selling capital assets held for a specified long period.
- Waiving LTCG tax on government bonds can improve post-tax returns for foreign investors.
- This may help attract global capital into Indian debt markets and improve liquidity in G-Secs.
- Higher foreign participation can support government borrowing and deepen India’s bond market.
- However, foreign bond inflows may also be affected by currency risk, interest rate movements, global liquidity and India’s macroeconomic stability.
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LTCG Tax Waiver: Deepening India’s Bond Market