India is preparing a significant policy intervention aimed at attracting overseas capital and strengthening financial market stability as geopolitical tensions linked to the Iran conflict continue to affect global investor sentiment. The proposed measure, which has reportedly received approval from the Union Cabinet led by Prime Minister Narendra Modi, seeks to eliminate capital gains tax on investments made by Foreign Portfolio Investors in Indian government securities, marking one of the most substantial tax reforms for foreign investors in recent years.
The move is being viewed as a strategic Foreign Investment Boost designed to counter growing market uncertainty, foreign capital outflows, and pressure on the Indian economy arising from elevated oil prices and broader geopolitical risks. Sources indicate that the proposed ordinance will amend the Income Tax Act and become effective following Presidential approval.
The reported decision comes at a critical time for India’s financial markets. Foreign Portfolio Investors have withdrawn substantial capital from Indian equities in 2026, while the Indian rupee has faced pressure amid rising crude oil prices and persistent global risk aversion. According to reports, policymakers believe that easing the tax burden on foreign investors could help improve India’s competitiveness as an investment destination and encourage fresh capital inflows into the country’s debt markets.
Capital Gains Tax Relief Targets Foreign Investors
Under the current tax framework, Foreign Portfolio Investors pay a 12.5% long-term Capital Gains Tax on eligible investments held beyond the specified holding period. In addition, foreign investors are generally subject to withholding tax on interest income generated from government bonds.
The proposed reform would reportedly remove the Capital Gains Tax burden on investments in Indian government securities, making these instruments significantly more attractive to international investors. Reports also suggest that authorities may consider removing withholding tax obligations on interest income from government bonds, although official details have yet to be released.
Market experts note that many competing global bond markets provide more favorable tax treatment for foreign investors. By reducing taxation on government securities, India could improve its position in the global race for investment capital, particularly at a time when investors are reassessing portfolio allocations due to geopolitical uncertainty.
Why the Government Is Pursuing a Foreign Investment Boost
The timing of the proposed Foreign Investment Boost is closely linked to ongoing economic challenges. Rising tensions in West Asia and concerns surrounding the Iran conflict have increased volatility in energy markets, creating inflationary risks for major oil-importing countries such as India.
Higher oil prices can negatively affect India’s trade balance, increase import costs, and place additional pressure on the rupee. Policymakers are therefore seeking ways to strengthen external capital inflows and maintain investor confidence.
Recent market data indicates that Foreign Portfolio Investors have been significant net sellers in Indian equities during 2026. The resulting capital outflows have contributed to currency weakness and increased market volatility. Government officials and market participants have increasingly argued that tax reforms may help reverse this trend and attract long-term international capital back into Indian financial markets.
Indian Bond Market Could Benefit Significantly
The proposed Government Securities Tax reform is expected to have its greatest impact on India’s sovereign debt market. Government securities are generally viewed as lower-risk investments compared with equities, making them attractive to institutional investors seeking stable returns during periods of uncertainty.
Analysts believe that eliminating Capital Gains Tax on government securities could encourage global pension funds, sovereign wealth funds, insurance companies, and large institutional investors to increase their exposure to Indian debt instruments.
India has already undertaken several initiatives to improve foreign participation in government securities, including regulatory simplification measures and expanded market access frameworks. The latest proposal would represent another step toward integrating India’s bond market with global capital markets.