To draw funds, prop rupee, Govt scraps FII capital gains, withholding tax on bonds, Pg1

Key Highlights:

• The Centre on Friday scrapped capital gains tax (long-term and short-term) and withholding tax for Foreign Institutional Investors (FIIs) on investments in government bonds.
• This decision, effective from April 1, 2026, aims to attract foreign funds and stabilise the rupee.
• It is projected to bring $45-50 billion in inflows over two years and help bridge an estimated $60 billion Balance of Payments (BoP) deficit for 2026-27.
• The Reserve Bank of India (RBI) simultaneously expanded the Fully Accessible Route (FAR) for government securities and removed investment limits under the General Route.

Detailed Insights:

• Previously, FIIs paid 12.5% long-term and 30% short-term capital gains tax, plus around 20% withholding tax on interest income from government bonds.
• The concessional 5% withholding tax rate for non-residents had ended in 2023, making India's rates among the highest globally.
• The move was enacted through an ordinance amending the Income Tax Act, 2025, after two months of internal discussions.
• Current FII investment in government bonds is ₹3.75 lakh crore, representing only 3.34% of the available ₹112.42 lakh crore under the General Route and FAR.
• A BoP deficit weakens the rupee, which has depreciated 5% since the war began and 10.3% over the last year.
• The RBI's measures include adding all new issuances of 15-, 30-, and 40-year bonds to the FAR and removing limits on short-term investment and concentration for FPIs under the General Route.
• Experts had identified the withholding tax as a significant barrier to attracting greater foreign debt inflows.

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Key Concepts Involved:

• Foreign Institutional Investors (FIIs)/Foreign Portfolio Investors (FPIs): Overseas entities investing in a country's financial markets.
• Capital Gains Tax: Tax levied on profit from the sale of an asset, like bonds or stocks.
• Withholding Tax: Income tax deducted at source from payments like interest or dividends.
• Balance of Payments (BoP) Deficit: When a country's total payments to other countries exceed its total receipts.
• Fully Accessible Route (FAR): A channel allowing non-residents to invest in specified Indian government securities without restrictions.