• Source:JND

In a significant development that, according to analysts, could play a role in the revival of the long-standing exodus of foreign investors--foreign portfolio investors (FPI)-- from the Indian capital market, the government exempted foreign investors from income tax on interest earnings and capital gains from government securities. Doubling down on the govt move, Reserve Bank of India announced a slew of measures, including expanding the basket of specified government securities (G-secs) for overseas investors, to attract foreign capital.    

According to the latest NSDL data, the foreign portfolio investors have pulled out nearly Rs 2.55 lakh crore from India--including equity market and other capital investment instruments, considering rising inflation, volatility in the domestic equity market on the back of the Middle East crisis.

Meanwhile, after the announcement, the questions that arise in most people's minds are, Will these measures bring back foreign investors' interest in the domestic capital market? And what role do these moves play in the revival of Indian currency?      

Can These Moves Bring Back FPIs? 

Market experts believe that the exemption of tax on capital gain for foreign investors will make government bonds more competitive and attractive.  

Indian sovereign debt is less competitive among other major bond markets. As India integrates more deeply into global bond indices and seeks stable long-term foreign capital, this exemption comes at the right time," Nangia Global partner Sunil Gidwani said.

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"Apart from improving post-tax yields, the measure facilitates seamless index investing, Euroclear-style settlement structures and offshore portfolio rebalancing," Gidwani added.

Deloitte India partner Rajesh H Gandhi said that the development will increase the returns for FPIs from investment in Indian G-Secs by 15-20 per cent and improve the delta between returns on investment in Indian sovereign bonds compared to other countries, thereby making India a bit more attractive.

Meanwhile, the RBI governor Sanjay Malhotra said, "For government securities under the Fully Accessible Route (FAR), we are expanding the universe of 'specified securities' by including all new issuances of 15, 30 and 40-year tenor G-secs. In addition, limits on short-term investment, concentration and individual securities on FPI investment under the General Route are being removed."

He further noted that these measures, along with the tax benefits provided by the government, should help attract foreign capital for government borrowing.

Govt Scrapes Capital Gain Tax On G-Sec For FIIs

Earlier, in the morning, the government announced the scrapping of long-term capital gains tax on investments made by foreign institutional investors (FIIs) in government securities.

According to a gazette notification dated June 5, the government has issued an ordinance amending the Income Tax Act to provide tax exemptions on interest income and capital gains arising from the sale, exchange, or transfer of government securities, effective April 1.

This exemption applies to foreign institutional investors (FIIs) and the Bank for International Settlements (BIS), subject to prescribed information-reporting requirements.

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Foreign investors pay a 12.5 per cent long-term capital gains tax on listed shares and bonds held for more than 12 months. A 20 per cent withholding tax is also applicable on interest earned on government bonds.

Notes: Expert's quotes and some other information are taken from agency inputs (PTI)


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