A tax concession born from crisis — and the question of whether it’s enough.
FPI G-Sec tax relief through the ordinance route is not new — India deployed the same legislative shortcut in September 2019, when a surprise corporate tax cut from 30% to 22% was pushed through by executive order to arrest a slowdown. That move triggered a single-day Sensex rally of nearly 2,000 points and was widely credited with stabilising sentiment. The government is now reaching for the same playbook, this time scrapping the 12.5% long-term capital gains levy on foreign portfolio investors’ holdings in government securities.
The Union Cabinet approved an ordinance on Wednesday to amend the Income Tax Act and create this exemption. A formal notification is expected after presidential assent. The trigger is unmistakable: foreign portfolio investors have pulled a net ₹2.47 lakh crore out of Indian markets so far in 2026, more than double the ₹1.04 lakh crore withdrawn across all of 2025. The rupee, meanwhile, touched a record low of 96.965 against the US dollar on May 20 before recovering partially on the back of RBI intervention and easing oil prices following renewed US–Iran peace talks.
The context sharpens when placed against a longer arc. India secured inclusion in J.P. Morgan’s Government Bond Index–Emerging Markets in June 2024, which drew roughly $25 billion in passive inflows over the following year. A potential addition to the Bloomberg Global Aggregate Index — tracked by nearly $3 trillion in assets — was widely expected as recently as late 2025. But the geopolitical shock of the West Asia conflict reversed the momentum. FPIs turned net sellers of fully accessible route securities in FY26, unwinding much of the index-driven positioning.
What the exemption covers — and what it does not. The ordinance removes capital gains tax on G-Sec holdings by FPIs. But the 20% withholding tax on interest income from government bonds remains intact, as does the 12.5% LTCG rate on equities and other listed securities. In 2023, the government had already withdrawn a concessional 5% withholding rate on bond interest for FPIs, effectively raising their tax burden. The current relief, then, partially reverses a multi-year tightening — it does not represent a net loosening relative to, say, 2022.
For domestic investors holding government bonds in their portfolios or through gilt funds, the direct tax impact is nil — this exemption applies exclusively to FPIs. The indirect effect, however, could matter. If the exemption draws fresh foreign demand into the G-Sec market, bond prices could firm and yields could soften, marginally lowering borrowing costs for the government and, eventually, for corporates that benchmark against sovereign yields. That transmission, though, depends on volumes that have not yet materialised.
The 2019 parallel is instructive but imperfect. Corporate tax cuts applied to every domestic company; this FPI G-Sec tax exemption targets a narrow instrument class held by a specific investor category. Whether it reverses the outflow trend may depend less on the tax saving itself and more on broader variables: crude oil prices, the trajectory of the Iran conflict, and whether the RBI’s currency defence holds. Regulators have signalled additional measures are forthcoming. Until those details emerge, the ordinance reads more as a crisis-management signal than a structural reform — though the signal itself, given the 2019 precedent, is not one the market is likely to ignore.
This article is journalism and educational commentary, not investment advice. The author is not a SEBI-registered Research Analyst. Figures should be independently verified against official filings before any financial decision.
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