New bet to handle falling rupee, government removes capital gains tax; There will be a flood of dollars in the country!

Center scraps Capital gains Tax on FII: Amid pressure to attract foreign funds and stabilize the rupee, the Center took a big step on Friday. In fact, the government abolished both long-term and short-term capital gains tax on investments made by foreign institutional investors (FIIs) in government bonds. Along with this, the withholding tax that they have to pay on the interest income from these debt instruments has also been abolished.

Let us tell you that currently, foreign institutional investors pay 12.5% ​​tax on long-term capital gains, 30% on short-term capital gains and about 20% withholding tax on interest income.

Billions of dollars expected to come to India

The decision, taken after at least two months of internal negotiations, is expected to bring in billions of dollars of foreign funds in the coming years to offset government debt, and help to some extent reduce the rising balance of payments (BoP) deficit, which economists estimate could reach $60 billion in 2026-27.

Total investment of FIIs in government bonds

After President Draupadi Murmu’s approval of an ordinance brought to make changes in the Income Tax Act, 2025, the government said that these changes will come into effect from April 1, 2026. FIIs investment in government bonds stands at Rs 3.75 lakh crore, which is just 3.34% of the amount available under the so-called General Route and Fully Accessible Route (FAR) of Rs 112.42 lakh crore. These are two ways in which foreign investors can investment in securities We do. According to economists at Axis Bank, no tax on FII investment in government debt could lead to an inflow of $45-50 billion in two years.

Rupee improves after sharp fall

Balance of Payments (BoP) deficit puts downward pressure on the rupee. The rupee has gained some ground since breaching the 97-per-dollar level last month, but is down 5% since the war began on February 27 and has fallen 10.3% in the past year. After closing at 95.79 per dollar on Thursday, it had strengthened to 95.45 at 1 pm on Friday. Meanwhile, yields on government bonds fell after the ordinance was issued.

Tax exemption on any interest on government security and any capital gain arising from sale, exchange or transfer of such government security is applicable to FIIs as well as Bank for International Settlements. BIS is an organization of central banks around the world. It has yet to invest in India.

FIIs were paying 12.5% ​​tax on LTCG

So far, foreign investors were required to pay long-term capital gains tax of 12.5% ​​on listed stocks and bonds that they hold for more than 12 months, and were also required to pay withholding tax, which is equivalent to tax deducted at source, on the interest income from holding the bonds. Non-residents pay a withholding tax of about 20% on their interest income from government bonds, one of the highest in the world, after the 5% concessional rate ends in 2023. The tax on short-term capital gains was 30%.

Investors from countries with which India has double taxation avoidance agreements pay lower rates. At the same time, investors who do not have Indian tax residency suffer further losses as withholding tax has to be paid on the gross amount and losses cannot be set off from past gains.

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RBI is increasing government securities

Media reports were already claiming that the government and RBI are considering several measures to attract foreign investment, including cutting the withholding tax rate on government bonds. Along with scrapping the tax, the RBI said it is increasing the exposure to government securities under the so-called Fully Accessible Route (FAR), which will include all new issues of 15, 30 and 40-year bonds.