Arresting rupee’s fall: India eyes cut in taxes on bond investments by foreigners - here’s how it may help

Looking to tackle foreign outflows and preserve forex, the government is weighing a major cut in the tax burden imposed on foreign investors investing in domestic bonds. Policymakers are looking to bring the country’s framework closer to international standards and encourage greater capital inflows, according to people familiar with the discussions.Foreign investors in Indian bonds are required to pay both short-term and long-term capital gains taxes, depending on the tax treaties applicable to their home countries. India has agreements with several nations that allow certain investors to avail lower tax rates.In addition, coupon income earned from bonds attracts tax of nearly 20 per cent. Earlier, overseas investors enjoyed a concessional 5 per cent tax rate on interest income, but that benefit was withdrawn in 2023.The proposal was suggested by the Reserve Bank of India and is currently under active consideration by the Finance Ministry, sources told Bloomberg. Talks around reducing taxes for overseas investors have accelerated amid efforts to slow the rupee’s decline, they added.Following reports of the discussions, the rupee recovered from earlier losses, while bond prices strengthened. The yield on the benchmark 10-year government bond dropped by as much as five basis points to 7 per cent.Authorities have already introduced several defensive measures to limit pressure on the currency, including restrictions on trading positions. With the Iran conflict pushing global crude oil prices higher and increasing India’s import bill, attracting foreign capital has become increasingly important.The rupee has emerged as the weakest-performing currency in Asia in 2026 so far, having depreciated by more than 6 per cent against the US dollar.Global investors have repeatedly highlighted concerns over India’s relatively high tax structure compared with other emerging economies such as Indonesia, Malaysia, Mexico and South Africa. Despite government securities being included in major global bond indices tracked by firms such as JPMorgan Chase & Co. and FTSE Russell, foreign ownership remains limited at only about 3 per cent of the country’s $1.3 trillion bond market.Over the longer term, policymakers believe bringing India’s tax framework closer to global standards could support Prime Minister Narendra Modi’s broader ambition of transforming India into a developed economy by 2047.