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Informist, Friday, Jun. 5, 2026

 

By Priyasmita Dutta and Sagar Sen

 

NEW DELHI – The government is likely to let go of revenue amounting to nearly INR 10 billion annually due to the tax relief for foreign institutional investors announced earlier in the day, according to people aware of the development. "The majority of the hit to the exchequer will be coming from the removal of withholding tax," one of the sources told Informist. 

 

Earlier in the day, the government exempted foreign institutional investors from paying capital gains tax on investment in government bonds and from paying withholding tax on interest on such investments. The move is aimed at attracting foreign capital and shoring up foreign exchange reserves, which currently face pressure as India navigates one of its worst energy crises due to the war in West Asia.

 

"Based on the trend of investments by FPIs, the revenue foregone from the tax relief can be over INR 8 billion this year, maybe INR 10 billion," the source said. 

 

Foreign investors paid 12.5?pital gains tax on investments in listed shares and government bonds held longer than 12 months. They also paid 20% withholding tax, which is a tax deducted at source and is paid by foreign investors on interest income from their holding of Indian bonds. Foreign portfolio investors have pulled out $26.24 billion from Indian markets in 2026 so far, more than double the $10.92 billion they pulled out in the entire 2025.

 

According to Rajesh. H. Gandhi, partner, Deloitte India, the government's move will increase returns for foreign portfolio investors from investment in Indian bonds by 15-20% and improve the delta between returns on investment in Indian sovereign bonds compared to other countries, making India a bit more attractive. "FPIs investing only in government securities will also be free from any tax compliances such as return filing," he said. "The move should ease pressure on the rupee over the medium to longer term," he added. 

 

One of the sources cited above said the government took the measure despite it being negative for government finances, to give appropriate support to the economy amid current external conditions. The Budget has projected gross tax collections rising 8% to INR 44.04 trillion this fiscal year. Of the total tax mop-up, direct tax collections are expected to grow 11% to INR 26.97 trillion. This estimate now looks far fetched as data released last week showed the government missed the tax collection target for FY26 by over INR 534 billion. A slowdown in direct tax collections dragged down revenues in FY26, with income tax collections missing the revised target by nearly INR 1.30 trillion.

 

The tax relief announced earlier in the day will add to the pressure on the already-strained income tax collections target, although it is a relatively small figure. The sources and the finance ministry did not share the data on the target set for collections from capital gains tax and withholding tax for FY27 or the data on collections from these heads in the last few financial years. 

 

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

 

Given this situation, India's rupee has depreciated sharply, prompting the central bank to aggressively intervene in the market to limit its fall. India's foreign exchange reserves were at $681.38 billion as of May 29, over $47 billion lower than the record high just before the war started. Since the war started on Feb. 28, the rupee has fallen almost 6% against the dollar, hitting a lifetime low of 96.96 on May 20.  End

 

US$1 = INR 94.95

 

Edited by Avishek Dutta

 

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