India's government and central bank announced capital gains tax and withholding tax exemptions for foreign institutional investors and the Bank for International Settlements on income from government bonds starting April 1, 2026 [1, 2, 3, 4]. The tax breaks apply retrospectively to interest earned and capital gains from government securities [2, 3, 4].

The government also removed ownership caps on some long-tenor sovereign bonds, allowing foreign investors unlimited access to these instruments [1, 5, 4]. The Reserve Bank of India expanded the list of government securities available for foreign investment and eliminated limits on short-term investments, concentration, and individual securities for foreign portfolio investors [1, 5, 4].

These steps aim to stabilize the Indian rupee, which has depreciated over 5-6% this year amid rising energy prices, foreign equity outflows, and geopolitical tensions [1, 5, 6, 7, 4, 8]. On May 20, the rupee hit a record low of 96.9650 against the US dollar [5].

Foreign investors had net inflows of $1.4 billion into Indian government debt so far in 2026 but saw large equity outflows approaching $28 billion since January [6, 4]. Previously, foreign investors faced a 12.5% long-term capital gains tax on listed shares and bonds held over 12 months, and a 20% withholding tax on interest from government bonds [6, 3, 4].

RBI Governor Sanjay Malhotra said the tax exemptions and expanded access will allow for a "much better BOP (balance of payment) this year," than otherwise expected [4]. Economist Krishna Bhimavarapu of State Street Global Advisors called the timing "very good," saying the measures "will help the rupee, which has been mostly falling due to the strong currency outflows" [4]. Madhavi Arora, chief economist at Emkay Global Financial Services, cautioned that while "any tax easing should help flows at the margin," it "won't be a magic bullet" but could be positive medium term [6].

The rules require disclosure to tax authorities to qualify for the exemptions [3]. The government formally approved the plan on June 4 and announced it June 5 [1, 2, 6, 3, 4].