FPIs Benefit from Tax Relief on Gilts, Simplifying Investment Landscape
In a strategic move to combat capital outflows and support the depreciating rupee, India has abolished the long-term capital gains tax (LTCG) and withholding tax on interest for foreign portfolio investors (FPIs) holding government securities (G-secs). This measure follows significant foreign investor withdrawals, amounting to ₹2.47 lakh crore in 2023, exacerbating the rupee’s decline by approximately 6% against the dollar. The reform, effective from April 1, as outlined in a recent gazette notification, aims to enhance the attractiveness of Indian assets for foreign investment, particularly in light of rising geopolitical tensions impacting investor sentiment.
The retrospective scrapping of the LTCG tax, previously set at 12.5% for assets held over 12 months and the withholding tax of 20% on G-sec interest, is expected to increase returns on these investments by an estimated 15-20%. This move will not only make Indian G-secs comparatively appealing but may also facilitate greater inflows, enhancing India’s positioning in the international bond market. Analysts have noted that these adjustments could potentially assist in the inclusion of Indian government securities in global bond indices, further attracting FPI allocations.
In addition to the tax reforms, the government has relaxed investment regulations for overseas entities, thereby simplifying the mechanisms through which FPIs can invest in Indian equities and long-tenor government securities. Notably, exemptions from LTCG and withholding taxes will also apply to the Bank for International Settlements (BIS), a pivotal institution in the global financial landscape. Experts estimate that this exemption could trigger substantial investments amounting to between $7-11 billion into Indian G-secs, reflecting increasing confidence in India’s financial assets amidst volatile global conditions.
Overall, these fiscal adjustments represent a critical effort by the Indian government to stabilize the rupee, reinvigorate foreign investment, and improve the economic outlook. Investors should monitor the subsequent capital inflows and market reactions as these reforms are implemented, gauging their long-term impact on India’s financial stability and growth trajectory.
Source: The Economic Times
(Expert Note: This report was prepared by the Wealthova team.)