The Indian government has scrapped long-term capital gains tax on investments made by foreign institutional investors (FIIs) in government securities through an Ordinance issued on Friday, aiming to attract dollar inflows and stabilize the rupee.
Ordinance Amends Income Tax Act
The Ordinance brings changes to the Income Tax Act to provide the exemption. The government decided to remove the capital gains tax on G-secs to attract long-term, patient capital, as these instruments have longer tenures.
Context of Capital Outflows
This decision comes at a time when foreign investors have pulled out a massive Rs 2.6 lakh crore from equities so far this year, significantly higher than the Rs 1.66 lakh crore withdrawn in the entire 2025 due to geopolitical tensions. In the first three days of June alone, foreign investors withdrew about Rs 34,000 crore from equities, putting additional pressure on the rupee.
However, foreign investors have invested over Rs 17,000 crore in the debt market through the Fully Accessible Route (FAR). Nevertheless, they withdrew about Rs 4,000 crore under the general debt limit and Rs 340 crore through the Voluntary Retention Route (VRR) so far this year.
Tax Rate Changes
Currently, FIIs have to pay a long-term capital gains (LTCG) tax of 12.5 per cent on their gains from equity and debt investments. In the Union Budget presented in July 2024, the finance minister raised the LTCG tax rate on most assets to 12.5 per cent from 10 per cent. Meanwhile, short-term capital gains (STCG) tax on listed shares in India is taxed at 15 per cent, as per Section 111A of the Income Tax Act.
Rupee Depreciation and Forex Reserves
The rupee's slide to record lows has prompted authorities to step up efforts to stem its decline. Prime Minister Narendra Modi last month appealed to people to conserve foreign exchange amid a surge in oil import costs due to the West Asia crisis. The domestic currency has been depreciating due to several factors, including US trade tariffs, record foreign fund outflows, and a rising import bill, putting pressure on the country's fisc. The RBI usually uses its forex reserves to check undue volatility in the rupee's value against the dollar.
The rupee settled at a record closing low of 96.86 against the USD on May 20, 2026, dropping 33 paise from its previous close. Once considered among Asia's more stable currencies, the rupee has become one of the worst-performing emerging market currencies this year, pressured by expensive oil, capital outflows, widening trade deficits, and a surging US dollar. It has depreciated about 7 per cent so far in 2026 and is down roughly 6 per cent since the outbreak of the Iran conflict on February 28. The value of the rupee against the dollar was 89.94 at the opening trade and closed at 89.98 on the first day of the calendar year.
Forex Reserves Decline
India's forex reserves dropped by USD 7.511 billion to USD 681.384 billion during the week ended May 22. The kitty had expanded to an all-time high of USD 728.494 billion during the week ended February 27 this year before the onset of the Middle East conflict, which led to several weeks of decline as the rupee came under pressure and the RBI intervened in the forex market through dollar sales. India's forex reserves stood at USD 686.801 billion in the week to January 2, 2026.
Additional Measures
Separately, the Reserve Bank of India permitted some long-tenor sovereign notes as fully accessible, allowing overseas investors to buy them without limits. The previous tweak to the list of government securities available under this route was in 2024, when the central bank removed 14-year and 30-year bonds.
