The government crucial step in promoting capital inflows from Foreign Portfolio Investors (FPIs) to control the impact of the Middle East war.
The Union Cabinet headed by Prime Minister Narendra Modi has approved an ordinance to change the Income Tax Act, according to sources. The change would exclude FPIs from paying capital gains tax on investments in government securities. The ordinance will be implemented after Presidential approval.
As of now, foreign investors are subject to 12.5% long-term capital gains tax (LTCG) on listed equity shares and bonds with a holding period of over 12 months. They also pay withholding tax on interest from government bonds at a rate of 20%. The previous concessional 5% tax rate is no longer in effect as of 2023.
The move arrives amid heavy withdrawal of foreign investors from Indian markets. Net FPI outflows (for the current calendar year) have reportedly reached Rs. 2.47 lakh crore, more than double the Rs. 1.04 lakh crore withdrawn in 2025.
The rupee has also been under pressure. It hit an all-time low of Rs. 96.9650 on May 20 against the US dollar, but has been partially revived amid the intervention of the Reserve Bank of India (RBI) and the easing crude oil prices. The rupee closed at Rs. 95.71 per dollar on Wednesday, up 0.5% from Tuesday's level.
The 10-year government bond yield, which has been the benchmark, also rose by one basis point to 7.02%.
According to Harsha Vardhana VM, Group CEO, Atom Financial Services, the numbers are too large to dismiss. "FPIs were net sellers in India in eight of the 12 months in 2025, with total outflows of Rs 1,66,286 crore. January 2026 alone saw a Rs 33,598 crore exit, the highest monthly outflow since August 2025. The LTCG tax is contributing, but it is one factor in a five-variable equation."
If India's LTCG is an extra cost for sovereign wealth funds and pension funds without a home country, it is particularly challenging, he added.
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The proposed measure also arrives when India and the US are holding trade talks. A US trade team, headed by chief negotiator Brendan Lynch, is in New Delhi to discuss an interim trade deal and the Bilateral Trade Agreement.
The talks are held on market access, non-tariff barriers, customs and trade facilitation, investment promotion and economic security cooperation, according to the commerce ministry.
The government is also likely to consider taking further measures to ensure foreign exchange stability and boost foreign capital inflows, such as permitting foreign exchange investors known as Persons Resident Outside India (PRIs) to invest in listed domestic companies under the portfolio investment scheme (PIS).