As global markets grapple with the fallout of the ongoing US-Iran conflict, the Indian government is weighing a series of measures aimed at attracting foreign investment and reducing pressure on the economy. Among the key proposals under consideration is the removal of capital gains tax on foreign portfolio investors' holdings in government securities, per a report by The Times of India.
Government weighs tax relief for foreign investors
According to reports cited by TOI, the Union Cabinet-led by Prime Minister Narendra Modi has approved an ordinance to amend the Income Tax Act, paving the way for the proposed exemption. The measure is intended to make Indian government bonds more attractive to overseas investors at a time of sustained capital outflows.
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Currently, foreign investors pay a 12.5 per cent long-term capital gains tax on listed equities and bonds held for more than a year. Interest income earned from government securities is also subject to a 20 per cent withholding tax. A concessional 5 per cent tax rate that had benefited foreign investors was withdrawn in 2023.
More measures to boost capital inflows
Per TOI, the government is also expected to roll out additional steps to encourage overseas investment.
One proposal under consideration involves allowing Persons Resident Outside India (PROIs) to invest in shares of listed Indian companies through the portfolio investment scheme.
Separately, the Reserve Bank of India may expand the scope of the Fully Accessible Route (FAR) by including select long-duration government securities. This would allow foreign investors to buy these bonds without ownership restrictions. The RBI last revised the FAR list in 2024, when 14-year and 30-year government bonds were excluded.
Pressure from outflows and a weaker rupee
The proposed changes come against a backdrop of persistent foreign capital withdrawals. So far this calendar year, net foreign portfolio investor (FPI) outflows have reached Rs 2.47 lakh crore, more than double the Rs 1.04 lakh crore recorded during calendar year 2025.
The rupee has also faced significant pressure. It touched a record low of 96.965 against the US dollar on May 20 before recovering some ground, aided by RBI intervention and softer crude oil prices linked to renewed diplomatic efforts between Washington and Tehran.
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Policymakers focus on stability
The rupee's sharp decline has prompted policymakers to step up efforts to support the currency. Rising oil import costs, foreign investor withdrawals and the economic impact of the Iran conflict have all added to the pressure.
Although the rupee recovered to close at 95.71 against the dollar on Wednesday, it remains the second weakest-performing currency in Asia this year, having lost more than 6 per cent against the dollar.
