India Weighs Tax Relief For Foreign Bond Investors Amid Rupee Pressure

India is evaluating a proposal to reduce taxes imposed on foreign investors in the domestic bond market as policymakers seek to attract overseas capital and improve the competitiveness of the country’s debt market, according to people familiar with the matter.

Invest in Indian Markets and Unlock Future Potential With 5paisa!

Open Account Now

The proposal was recommended by the Reserve Bank of India and is under active consideration by the Finance Ministry, as per reports. Discussions have gained momentum amid pressure on the rupee following elevated crude oil prices and rising import costs linked to the conflict in West Asia.

The Finance Ministry and the Reserve Bank of India have not issued official comments on the matter.

Following reports of the discussions, the rupee recovered from intraday losses, while government bond prices strengthened. The yield on the benchmark 10-year government bond fell as much as five basis points to 7%.

Push To Attract Overseas Capital

Authorities have been exploring measures to increase foreign participation in India’s bond market as the country faces pressure from a widening import bill due to higher energy prices.

India imports a significant share of its crude oil requirements, making capital inflows important for supporting the balance of payments and stabilising the domestic currency.

Foreign portfolio investors currently face both short-term and long-term capital gains taxes on Indian bond investments, depending on the tax treaty applicable to their jurisdiction.

Interest earned on the coupon payments on bonds is also taxed at close to 20%. Earlier, foreign investors benefited from a concessional tax rate of 5% on interest income, but that provision ended in 2023.

Foreign Participation Remains Limited

Despite the inclusion of Indian government bonds in global indices such as those maintained by JPMorgan Chase & Co. and FTSE Russell, foreign ownership in the domestic bond market remains relatively low.

Foreign investors currently hold around 3% of India’s $1.3 trillion government bond market, according to available market data.

Market participants have repeatedly highlighted that taxation on foreign bond investments in India remains higher than in several emerging markets, including Indonesia, Malaysia, Mexico and South Africa.

The government and the central bank have already introduced multiple steps in recent months to manage pressure on the rupee, including measures aimed at controlling speculative trading positions in currency markets.

Focus On Long-Term Market Development

The proposed tax changes are also linked to broader efforts to deepen India’s financial markets and attract long-term overseas capital.

Authorities have been working to increase India’s integration with global debt markets after Indian government securities were included in major international bond indices.

Lowering the tax burden on foreign investors is expected to improve the attractiveness of Indian debt instruments for global funds and institutional investors.

The discussions come at a time when policymakers are balancing currency stability, capital inflows and rising external risks linked to global commodity prices and geopolitical tensions.