Prime Highlights
- The government exempted FPIs from income tax on interest and capital gains from government securities.
- The RBI expanded FAR to include new 15-year, 30-year, and 40-year government bond issuances.
Key Facts
- CCIL is a financial market infrastructure institution providing clearing and settlement services in India.
- FPIs currently face a 20 percent withholding tax on interest from Indian government bonds.
Background
Foreign portfolio investors (FPIs) have invested around ₹35,000 crore in Indian bonds so far this month, following the government’s decision to exempt them from income tax on interest income and capital gains from these investments. Data from the Clearing Corporation of India Ltd (CCIL) confirmed the inflows.
All investments came through the Fully Accessible Route (FAR) of Indian government securities. FAR permits non-resident investors to make unlimited investments in certain Government of India-dated securities. FPI holdings in FAR securities rose to ₹3.58 lakh crore as of the third week of June, up from ₹3.23 lakh crore in the first week of June.
Before this, foreign investors had brought in ₹5,512.108 crore in May and ₹5,262.016 crore in April. March, however, saw outflows of ₹17,687.988 crore.
The government promulgated an ordinance in the first week of June, amending the Income Tax Act to provide these exemptions. The relief applies retrospectively from April 1, 2025. The move aimed to attract more foreign capital into domestic debt and support the rupee.
Currently, FPIs pay a long-term capital gains tax of 12.5 per cent on listed shares and bonds held over 12 months, while interest on government bonds attracts a 20 per cent withholding tax.
The Reserve Bank of India also expanded FAR securities in its June monetary policy announcement, adding all new 15-year, 30-year, and 40-year government bonds. It also removed the limitations on certain stocks, concentration, and short-term investments from the General Route.
According to the RBI, the combination of tax advantages and the above-mentioned measures would enable attracting foreign funds for government borrowings.
