The Centre may lose around Rs 10,000 crore this fiscal following the tax relief granted to foreign portfolio investors (FPIs) on debt investments but the benefits “far outweigh” the cost, government sources told Moneycontrol.
On June 5, the Centre exempted FPIs from paying capital gains tax – both long-term and short-term — on gains earned from the sale, exchange or transfer of government securities. It also removed the 20 percent withholding tax on interest income from such investments.
Before the change, foreign investors paid 12.5 percent long-term capital gains tax on G-secs held for more than 12 months and a 20 percent withholding tax on interest income.
The Reserve Bank of India extended support for hedging costs on FCNR(B) deposits to encourage banks to mobilise more foreign currency deposits from non-resident Indians.
The central bank also introduced a concessional forex swap window for public-sector external commercial borrowings (ECBs), allowing state-run firms to access foreign-currency funding at stable, predictable hedging costs.
There is no clear estimate of the FPI inflows the Centre is expecting into bonds, but according to economists, these measures, along with the steps announced by the RBI, could bring in about $20-30 billion inflows this year.
“We don’t want to put any number to our expectation of inflows. But what economists say is a fair assessment,” one of the sources said.
According to an SBI Research report, foreign investors hold around Rs 380,487 crore (about $46 billion) of Indian government bonds across both the fully accessible route (FAR) and general routes.
Under the FAR, there is no upper ceiling on how much FPIs can buy. The government and RBI specifically designate certain securities under FAR. The general route, meanwhile, is the traditional, strictly regulated framework for foreign investment in Indian debt.
FPI holdings of Rs 3.8 lakh crore earn around Rs 26,000–27,000 crore in interest annually. At 20 percent withholding tax, the tax deducted would be Rs 5,200–5,400 crore, the report, released on June 5, said. The annual tax gains from capital gains levy would amount to roughly Rs 500-1,000 crore, thereby taking the total revenue loss to Rs 5,700-6,400 crore.
In FY27, India has seen an outflow of around Rs 3,200 crore in debt from FPIs. Finance minister Nirmala Sitharaman on June 15 suggested that the government could announce more measures to boost capital flows.
