The Indian government announced the removal of long-term capital gains tax on investments by foreign institutional investors (FIIs) in government securities on Friday. This move aims to attract foreign inflows amid significant outflows from the equity market in 2026, which have pressured the Indian rupee. So far this year, FIIs have withdrawn ₹2.6 lakh crore from equities, surpassing the ₹1.66 lakh crore withdrawn in 2025, according to livemint.com.
The decision was made in response to the ongoing geopolitical tensions, including the Iran conflict that began on February 28, which have contributed to the depreciation of the rupee by about 7% this year. Despite the equity outflows, foreign investors have still invested over ₹17,000 crore in government securities, signaling some confidence in the debt market. The tax removal is expected to further incentivize FIIs to increase their investments in government bonds, stabilizing foreign exchange and capital markets.
This policy adjustment addresses the challenges posed by large-scale foreign equity withdrawals and aims to improve the attractiveness of government securities for foreign investors. The move aligns with efforts to stabilize the rupee and support the capital markets by providing tax relief on debt investments. It follows a trend of governments globally adjusting tax policies to manage foreign investment flows amid geopolitical uncertainties and currency volatility.
The rupee's depreciation of roughly 6% since the Iran conflict and the record foreign equity outflows underscore the urgency behind this policy change. The government’s announcement on June 5, 2026, marks a significant step to counterbalance these pressures by making government bonds more appealing to FIIs, as reported by livemint.com.