New tax exemptions target overseas capital to defend domestic currency
India's Union Cabinet has approved a complete elimination of capital gains tax for foreign portfolio investors purchasing government securities. This policy shift, cleared through a new ordinance amending the Income Tax Act, seeks to stabilize the domestic currency and attract overseas funds. The changes will officially take effect as soon as they receive presidential assent.
Strategy to Counter Global Shocks
Global headwinds have pushed policymakers to take drastic defensive actions. Prolonged conflict involving Iran has kept crude oil prices elevated, which directly hurts the Indian economy by inflating energy bills and widening the trade deficit. Concurrently, overseas funds have withdrawn nearly 2.5 lakh crore rupees from domestic equities so far this year, marking a historical high for capital flight.
Significant Changes for Overseas Portfolios
|
Tax Category |
Current Framework |
New Approved Policy |
|
Long-Term Capital Gains |
12.5% on assets held over 12 months |
Completely Abolished (0%) |
|
Withholding Tax on Interest |
20% flat rate |
Restructuring under active review |
Previously, international fund managers faced a 12.5% long-term levy on bonds held past one year. Getting rid of this fiscal hurdle makes sovereign debt assets much more competitive when stacked against other emerging economies. Inside sources suggest this is merely the opening move, with additional administrative updates regarding withholding rates expected from fiscal regulators soon.
