Government waives 12.5% LTCG tax on FII investments in government bonds
The Government of India (GoI) has promulgated an ordinance waiving the 12.5% long-term capital gains (LTCG) tax on foreign institutional investments (FII) in government bonds. This exemption will be effective from April 1, 2026. The decision aims to rationalize the tax treatment for FPIs in Government Securities, recognizing the importance of a competitive tax regime for attracting global capital. This move comes after FIIs sold a significant amount of Indian securities. Experts believe this will make Indian government securities more tax-efficient for overseas investors, though some argue it doesn't fully address concerns of long-only equity investors regarding capital gains structure, currency risk, and valuation premium.
Key Points
- The Indian government has waived the 12.5% long-term capital gains (LTCG) tax on foreign institutional investments (FII) in government bonds.
- This tax exemption is set to take effect from April 1, 2026, aiming to create a more competitive tax regime for attracting global capital.
- The measure is expected to make Indian government securities more attractive and tax-efficient for overseas investors.
- The decision comes amidst significant FII outflows from Indian securities, indicating a strategic move to reverse the trend.
- While beneficial for bond investments, some experts suggest it may not fully address the broader concerns of long-only equity investors.
Exam Facts
- Tax waived: 12.5% Long Term Capital Gains (LTCG) tax.
- Beneficiaries: Foreign Institutional Investments (FII) in government bonds.
- Effective date: April 1, 2026.
- Context: FIIs sold ₹2.5 lakh crore worth of Indian securities as per NSDL data.
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