Foreign Investors Surge Into Indian Bonds After Government Grants Major Tax Exemption on Debt Income

Foreign Investors Surge Into Indian Bonds After Government Grants Major Tax Exemption on Debt Income​

Foreign portfolio investors have significantly increased their investments in Indian bonds this month, pouring approximately ₹35,000 crore into the domestic debt market. This influx follows a crucial government move providing tax exemptions on interest income and capital gains derived from these securities for foreign entities.

The investment surge highlights the strategic importance of deepening India's bond market to attract sustained global financial participation. Clearing Corporation of India Ltd (CCIL) data tracked this flow, noting that all investments were made under the Fully Accessible Route (FAR).

Impact of Tax Exemption on FPI Investment Flows​

The government introduced an ordinance amending the Income Tax Act, effective June 5, specifically to exempt FPIs from income tax regarding interest and capital gains. This exemption applies retrospectively, starting from April 1, 2025.

This targeted move was designed by the government as a measure to attract increased foreign capital into domestic debt markets. It also serves a broader economic goal of supporting the rupee amid existing external pressures.

Prior to this favorable tax environment, FPI investment flows demonstrated volatility. In May, investors channeled ₹5,512.108 crore into the sector. This was followed by an outflow amounting to ₹17,687.988 crore in March and a flow of ₹5,262.016 crore in April.

Broadening Access Through Monetary Policy Measures​

Beyond the tax incentives, the Reserve Bank of India (RBI) simultaneously took steps to expand investment opportunities within government securities. The RBI expanded the scope of FAR by including all new issuances of 15-year, 30-year and 40-year tenor government securities.

The central bank also made significant changes regarding FPI investments under the General Route. These changes included removing previous limits related to short-term investment, concentration, and individual securities.

Global Investor Attraction: FAR and Debt Market Deepening​

Foreign investors now face a more attractive landscape compared to prior norms. Previously, interest earned on government bonds was subject to a withholding tax of 20 per cent. For listed shares and bonds held for over 12 months, foreign investors were subject to a long-term capital gains tax of 12.5 per cent.

The RBI affirmed the intent behind these comprehensive measures during its June monetary policy announcement. The central bank stated that the combination of regulatory changes and new tax benefits should effectively draw in foreign capital for government borrowing.

These combined actions signal India's firm intention to deepen the domestic bond market, facilitating greater engagement from global financial institutions. FPI holdings in FAR securities reached ₹3.58 lakh crore on Tuesday, marking a rise from the ₹3.23 lakh crore recorded on June 3.