India has launched a significant package of financial reforms and tax incentives designed to attract substantial foreign capital. This initiative, combining tax relief for Foreign Institutional Investors (FIIs) and a series of measures from the Reserve Bank of India (RBI), is projected to draw more than $40 billion, approximately ₹3.81 lakh crore, into the country.
Tax Relief for Foreign Investors
The Central government has enacted an ordinance providing crucial tax exemptions for FIIs investing in government securities. Effective retrospectively from April 1, 2026, this ordinance eliminates two major tax burdens:
- A 12.5% long-term capital gains tax on government bonds held for over 12 months.
- A 20% withholding tax on interest income derived from government securities.
These exemptions, also extended to the Bank for International Settlements (BIS), are intended to make Indian markets more globally competitive and attract durable, long-term capital from entities like pension funds, sovereign wealth funds, and insurance companies. SBI Research estimates these tax savings could benefit foreign investors by ₹4,000-5,000 crore from interest income exemptions and an additional ₹500-1,000 crore from capital gains tax relief, significantly improving post-tax returns.
RBI's Market Reforms
Complementing the tax relief, the RBI has introduced several measures to enhance foreign participation in India's debt market:
- Expanded Fully Accessible Route (FAR): New 15-year, 30-year, and 40-year government securities have been brought under the FAR, granting foreign investors unrestricted access. This is expected to boost demand for long-term government securities, improve market liquidity, and potentially lower government borrowing costs.
- Concessional Forex Swap Facilities: To encourage External Commercial Borrowings (ECBs) by public sector enterprises, the RBI has introduced concessional forex swap facilities. This aims to help government-owned companies secure cheaper overseas funding while increasing foreign currency inflows.
- FCNR(B) Deposit Enhancements: The RBI is bearing hedging costs and offering temporary regulatory relaxations for Foreign Currency Non-Resident (Bank) [FCNR(B)] deposits. This allows banks to offer more attractive returns to Non-Resident Indians (NRIs), with SBI Research suggesting potential inflows could exceed the $34 billion mobilized during the 2013 FCNR(B) drive.
Broader Economic Impact
These combined measures are strategically timed to address global capital flow volatility stemming from geopolitical tensions, inflation concerns, and slowing growth worldwide. By reducing tax costs, expanding bond market access, and encouraging foreign currency inflows, India seeks to strengthen its external sector, improve liquidity, and attract stable, long-term investors rather than short-term speculative capital.
If SBI's projections materialize, this initiative could emerge as one of India's most substantial foreign capital attraction programs in recent years, potentially bringing ₹3.81 lakh crore into the country while simultaneously supporting the Indian rupee and bolstering the government bond market.