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Informist, Thursday, Jun. 4, 2026

 

NEW DELHI – The Union Cabinet Wednesday gave green signal to a plan to lower the capital gains tax and withholding tax on government bonds to attract foreign investment and help protect its foreign exchange reserves, according to sources. The proposal comes as India navigates one of its worst energy crisis stemming from the war in West Asia.

 

According to one of the sources cited above, mid-financial year tax changes will have to be brought in through an ordinance proposing changes to the Income Tax Act, 2025. Following the cabinet's nod, the ordinance will now have to be approved by the President, the source said. 

 

According to the second source, the government is considering scrapping long-term capital gains tax for foreign investors to bolster capital flows as the rupee faces severe strain from the volatile global situation. Currently, foreign investors pay 12.5?pital gains tax on investments in listed shares and government bonds held longer than 12 months. 

 

The rupee has depreciated by 6% against the dollar since the war began in West Asia on Feb. 28. It fell to a record low of 96.96 against the dollar on May 20, driven by concerns about a widening current account deficit and persistently high energy import costs due to the war. 

 

India is facing a severe energy crisis, as it has been exposed to energy supply and price shocks due to its dependence on the Persian Gulf for oil and gas. Crude oil prices have soared by around 60% following the closure of the Strait of Hormuz since early March. Nearly half of India's crude oil passed through this crucial waterway. 

 

India applies capital gains tax on FPIs if the asset is located in India, with provisions for relief under tax agreements with other nations, called double taxation avoidance agreements. This agreement, popularly called DTAA, is a bilateral tax treaty signed between two or more countries to prevent the same income from being taxed twice, once in the country where it is earned and again where the taxpayer resides. 

 

The ordinance may also include a provision to lower the withholding tax from the current 20% to 5%, with some consideration to even reducing it to nil, sources told Informist. Withholding tax is a tax deducted at source and is paid by foreign investors on interest income from their holding of Indian bonds. At present, non-residents pay a withholding tax of about 20% on the interest earned, after the government hiked the concessional rate of 5% in June 2023.

 

Finance Minister Nirmala Sitharaman had said last week that the government is open to listening to every suggestion that will help protect foreign portfolio investors and the Indian currency. "We are always ready to hear and listen to people. We will take their inputs," Sitharaman had said on the sidelines of an event in Mumbai while responding to questions on FPIs' demand for tax relief in order to increase investments in India. 

 

So far in 2026, FPIs have pulled out $22.75 billion from Indian markets, more than double the $10.92 billion they pulled out in the entire 2025. In 2025-26 (Apr-Mar), the country's net FDI inflows surged to $7.65 billion from $959 million a year earlier. However, in March – when the impact of the West Asia war played out - India saw net foreign direct investment inflows of $1.57 billion, down nearly 65% on month from $4.44 billion in February.   End

 

US$1 = INR 95.75

 

Reported by Priyasmita Dutta and Sagar Sen

Edited by Deepshikha Bhardwaj

 

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