India's Government Cancels Tax Burden on Foreign Investors in Government Bonds, Leading to Record Monthly Inflow of Overseas Funds
In June, foreign institutional investors net purchased approximately ₹35,000 crore of Indian government bonds, far exceeding the total for April and May. This followed the government's exemption of capital gains tax and withholding tax on interest through the Income-Tax Ordinance, effective retroactively from April 1, 2026, while also expanding the scope of the Fully Accessible Route.
This policy reduces the cost of entry for overseas funds, attracting long-term investors such as pension funds and sovereign wealth funds, stabilizing the rupee and smoothing the yield curve.
Market mechanisms show that global funds, as buyers, are flooding into the Indian bond market due to the zero tax burden, driven by policy openness. Funds are shifting from other high-tax bonds in emerging markets to India; the Indian government and local institutions benefit from lower financing costs, while overseas sellers face reduced competition.
Source: Public Information
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India previously adjusted FPI channel restrictions multiple times in 2024-2025 and introduced the Fully Accessible Route, but the tax burden kept foreign investment in the bond market below 3-4% for a long time. Similar to the brief inflow after the 2022 tax reform, this comprehensive tax exemption is a continuation of the government's response to equity outflows and rupee pressure.
In terms of capital pathways, the Indian government has exempted 12.5% long-term capital gains tax and 20% withholding tax retroactively to attract overseas long-term capital into G-Secs and green bonds, motivated by the need to replenish foreign exchange reserves, buffer against oil price shocks, and provide low-cost financing for domestic infrastructure and fiscal deficits.
Similar to Brazil's tax reforms in the 2010s attracting sovereign funds or Indonesia's recent bond market opening increasing foreign holdings, India's bond market is transitioning from the periphery of emerging markets to a core allocation phase, with policy and index inclusion expectations accelerating foreign penetration.
Essentially, this is a regulatory change: the Indian government is actively relaxing foreign investment access and tax systems to reshape the structure of capital inflows, with mechanisms aimed at reducing holding costs and enhancing relative yield attractiveness, guiding funds from short-term speculation to long-term allocation, thereby restructuring the emerging market debt financing landscape and alleviating exchange rate volatility pressure.
ABAB News · Cognitive Law
High tax barriers block capital; zero tax thresholds attract long-term money.
Once the policy switch is flipped, a flood of funds arrives.
Attracting foreign investment relies not on interest rates, but on structural friendliness.