Government Removes LTCG Tax on Foreign Investments in Sovereign Bonds

The Centre has abolished long-term capital gains (LTCG) tax on investments made by Foreign Institutional Investors (FIIs) in Government securities through the newly issued Income-Tax (Amendment) Ordinance, 2026. The move is aimed at encouraging foreign investment into India’s debt market amid persistent rupee weakness and significant foreign portfolio outflows.

Under the existing tax framework, FIIs were liable to pay LTCG tax at 12.5% on gains arising from investments in both debt and equity instruments. The new ordinance grants a specific exemption for investments in Government securities, effectively removing the LTCG tax burden on such investments.

The decision comes at a time when India is witnessing substantial foreign portfolio investor (FPI) outflows. Overseas investors have reportedly withdrawn around Rs.2.6 lakh crore from Indian equity markets during the current calendar year, including net sales of approximately RS.34,000 crore in the first few days of June alone. The continued outflow of foreign capital, coupled with elevated crude oil prices, has exerted pressure on the Indian rupee.

Despite the equity sell-off, foreign investors have shown interest in Government debt securities, purchasing more than Rs.17,000 crore worth of bonds through the Fully Accessible Route (FAR). The government expects that removal of LTCG tax on Government securities will further improve the attractiveness of Indian sovereign debt for foreign investors and support capital inflows.

The development assumes significance as the Indian rupee remains the weakest-performing Asian currency in 2026, having depreciated by more than 6% against the US dollar during the year. The currency had touched an all-time low of 96.96 per US dollar on 20 May 2026, prompting continued monitoring and intervention by the Reserve Bank of India (RBI).

Commenting on currency stability, RBI Governor Sanjay Malhotra stated that while the central bank does not target any specific exchange rate, it will continue to intervene in the foreign exchange market when required to address excessive volatility and speculative flows.

The government’s latest tax measure is expected to strengthen the appeal of Indian Government securities among foreign investors and may help offset some of the pressure arising from sustained capital outflows from domestic equity markets.

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