How tax relief on bond investments will help FPIs, Pg17

Key Highlights:

• The government is considering reducing the withholding tax on bond investments from 20% to 5% to encourage overseas inflows.
• Withholding tax is levied on the interest earned by foreign investors on Indian bonds, acting as a tax deducted at source (TDS).
• A high withholding tax is seen as a deterrent to foreign capital inflows, especially with rising external pressures like high crude oil prices.
• India had a concessional 5% withholding tax rate until July 2023, after which it reverted to around 20%.
• At the end of March 2025, FPI investment in dated securities jumped by 43.2% to 43.9 billion from its level of 30.6 billion at end-March 2024.

Detailed Insights:

• The reduction in withholding tax aims to improve post-tax returns for foreign investors, making Indian debt more attractive.
• Lowering the tax could help stabilize forex reserves amid global economic uncertainty and geopolitical tensions.
• The previous concessional 5% rate was introduced in 2012 under Section 194LD of the Income Tax Act but expired in July 2023.
• Higher withholding taxes increase transaction costs and regulatory friction for overseas investors, reducing market attractiveness.
• Most countries impose withholding tax on foreign investors, but rates vary; the US imposes 30%, Germany 26.4%, France 25%, and China 10%.
• FPIs hold a relatively small share of India’s government debt, but their exposure increased after India's inclusion in global bond indices.
• The Reserve Bank of India (RBI) has capped FPI investment in government securities at 6% of the outstanding stock.

Key Concepts Involved:

• Withholding Tax (WHT): Tax collected at the source of income, deducted before remittance to the recipient.
• Foreign Portfolio Investor (FPI): An investor investing in financial assets of a country without directly managing them.
• Tax Deducted at Source (TDS): A process where tax is deducted at the point of income generation.