India Scraps Capital Gains Tax on Foreign G-Secs Investment

New Delhi, Jun 5 (PTI) The exemption of capital gains tax on G-secs by foreign investors is going to make government bonds more competitive and attractive, experts said.

In a bid to attract dollar inflow, the government scrapped long-term capital gains tax on investments made by foreign institutional investors (FIIs) in government securities through an Ordinance issued on Friday.

"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.

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


Over time, he said, it should broaden the investor base to include passive index trackers, supporting durable capital inflows into India's debt market.

According to Deloitte India partner Rajesh H Gandhi, the move 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.

The ordinance issued by the Government exempts capital gains and interest earned by foreign investors from tax with effect from April 1.

"The exemption is subject to FPIs 'furnishing information to be prescribed', which requirements will, hopefully, be procedural in nature and not substantive. Funds and Offshore Banking Units in IFSC, registered as FPIs, may also be eligible for the exemption," Price Waterhouse & Co LLP partner Nehal Sampat said.

Removal of this friction may also assist in the inclusion of Government securities in global bond indices in a larger way, which could eventually trigger more inflows into India, he added.