This Edition

India exempts foreign investors from capital gains and interest tax on government bonds

▶ What changed

The Indian government issued an ordinance — a form of emergency legislation that takes effect immediately without waiting for parliament — exempting FIIs and FPIs (foreign institutional investors and foreign portfolio investors, the categories under which most large cross-border capital flows into India) from capital gains tax and income tax on interest earned through Indian government bonds. The ordinance removes source-country tax on both coupons and capital gains for qualifying foreign investors in G-secs. Resident Indians and domestic funds are not included — they continue to pay tax on G-sec income under existing rules. The change is aimed at drawing more foreign capital into the government bond market to help fund the fiscal deficit at lower borrowing costs.

▶ What this actually means

If you are an expat

You left India years ago. You live in the UK, US or UAE. You have some INR savings — in an NRO or NRE account, or in Indian mutual funds — and you have been looking for a way to put that money to work inside India without the return being eaten by Indian tax before it reaches you. G-secs — bonds issued by the Indian central government, generally considered among the safest INR-denominated assets available — used to carry source-country tax on both the interest and any gains. That tax is now gone for qualifying foreign investors. If you access Indian bonds through an FPI-structure or an eligible NRI investment route, the return you see from the Indian side is now higher than it was. Your home country — the UK, US or UAE — will still apply its own rules to that income, so the net effect depends on where you are tax-resident. But the Indian layer of cost has been removed.

If you are a resident

You live in India and you pay tax here. This ordinance does not benefit you directly — resident Indians are excluded from the exemption. But you are affected indirectly. More foreign money flowing into G-secs tends to push bond prices up and yields down — meaning government borrowing gets cheaper. That has downstream effects on other interest rates in the economy, including potentially home loan rates and deposit yields, though these effects take time to feed through and are not guaranteed. The more immediate effect is on how the Indian bond market behaves: larger foreign participation means Indian yields may become more sensitive to global risk events, including decisions by central banks in the US and UK.

◆ Anita’s take  Investment Returns · Purchasing Power

Indian G-secs have been yielding around 6.5–7% in recent months. That is a meaningful number in a world where developed-market government bonds are yielding 4–5%. The source-country tax that used to sit on top of that — deducted before the return reached a foreign investor — was material enough to make the risk-adjusted case harder to make. Removing it does not change the INR risk, the currency volatility, or the fact that your home country will still tax the income. But it does improve the starting position. For NRIs who have been sitting on INR savings and looking for a way to put them to work without layering India tax on top of home-country tax, this is worth looking at properly. The question is not whether the exemption applies — it likely does through the right structure — but whether Indian sovereign debt fits your portfolio at current yields and FX conditions. That is a separate calculation. But at least the tax drag from the Indian side is no longer the reason to say no.

Settel

If you have assets in India and income abroad, Settel shows you what your INR holdings are worth in real terms — after currency moves, after tax in both countries. See your cross-border picture clearly.