India Scraps Tax on Foreign Bond Gains as $28B Flees Equities

In a bold move to attract foreign capital and stabilize its currency, India is set to scrap the long-term capital gains tax on foreign portfolio investments in government securities, a source familiar with the matter told Reuters on Thursday. The decision, approved by the cabinet, comes as the rupee has weakened more than 5% since the start of 2026, pressured by higher oil prices and a massive $28 billion exodus from equity markets.

The tax relief, which could also include the removal of a 20% withholding tax on interest earned from government bonds, is designed to make Indian debt more attractive to global investors. Currently, foreign investors face a 12.5% long-term capital gains tax on listed shares and bonds held longer than 12 months. The changes would bring India's tax treatment of foreign debt more in line with global norms, as the country remains one of the few that tax non-resident flows into debt.

Impact on Bond Markets and Rupee

India's benchmark bond yield eased one basis point to 7.01% in early trade following the news, signaling cautious optimism. Foreign investors have already pumped $1.4 billion into Indian government debt this year, but the outflows from equities—nearly $28 billion—have weighed heavily on the rupee. The tax reform is expected to encourage more inflows into debt, helping to offset the equity selloff and support the currency.

“India stands more or less in line with global standards on equity taxation, but is among the few countries that tax non-resident flows into debt,” the source said, speaking on condition of anonymity as the decision is not yet public. The move reflects the government's urgency to attract foreign capital amid a challenging global environment.

Timeline and Next Steps

The exact implementation date remains unclear, but the cabinet approval suggests a swift rollout. The finance ministry has not commented on the report. Analysts expect the tax break to be particularly appealing for sovereign wealth funds, pension funds, and other long-term investors seeking stable returns from emerging market debt.

The reform is part of a broader strategy to deepen India's bond market and reduce reliance on hot money from equities. With global interest rates still elevated, India's relatively high yields—coupled with the tax advantage—could make its government bonds a standout in emerging market portfolios.

Broader Market Context

India's equity markets have suffered from a perfect storm of geopolitical tensions, rising oil prices, and a strong dollar. The $28 billion outflow underscores investor nervousness about valuations and growth prospects. However, the debt market has remained resilient, and the tax reform could accelerate foreign participation.

Meanwhile, in a separate development, Honeywell's Quantinuum raised $1.68 billion in its U.S. IPO, signaling strong investor appetite for emerging technologies. While unrelated to India's tax move, it highlights the global hunt for yield and growth—forces that India is now trying to harness for its own debt markets.

Key Takeaways

1. India will scrap long-term capital gains tax on foreign portfolio investments in government securities to boost inflows and support the rupee.
2. Nearly $28 billion has been pulled from Indian equity markets this year, while debt inflows remain positive at $1.4 billion.
3. The reform aligns India's debt taxation with global standards and could attract long-term investors like sovereign wealth funds.
4. The timeline for implementation is unclear, but cabinet approval signals an imminent rollout.
5. The move is part of broader efforts to stabilize the rupee and deepen India's bond market.

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Sources: Source 1 | Source 2