In a bid to attract foreign capital inflows in the country the government has issued a new ordinance that scraps the long-term capital gains tax on investments made by foreign institutional investors (FIIs) in government securities.
This ordinance will bring changes to the Income Tax Act to provide the exemption and will be called the Income-Tax (Amendment) Ordinance, 2026. The centre will remove capital gains tax on government securities, as these primary securities provide long-term tenure.
Rupee volatility, foreign outflows key concerns
This decision comes as the Indian rupee continues to suffer volatility caused by elevated oil prices and FPIs outflow hits a record high, surpassing previous year’s outflow of Rs 1.67 lakh crore.
In the first three days of June FIIs were net sellers of domestic equities worth Rs 34,000 crore, and on a calendar year basis overseas investors have pulled out a record of Rs 2.6 lakh crore from Indian markets.
However, FIIs have purchased more than Rs 17,000 crore in debt markets through Fully Accessible Route (FAR), it added. So far this year, foreign investors have pulled out Rs 4,000 crore under the general debt limit and Rs 340 crore through Voluntary Retention Route (VRR).
Current long-term capital gains tax structure
Currently, FIIs pay LTCG tax of 12.5% on their gains from investments in debt and equity markets. In the Union Budget 2024, the government had raised the LTCG tax rate to 12.5% from the earlier 10%.
As per the Section 111A of the Income Tax Act, short-term capital gains (STCG) tax on listed shares in India is taxed at 15%,
The rupee’s continued volatility has prompted authorities to interfere in the currency markets. RBI Governor Sanjay Malhotra today said while the central bank has no target measures for the domestic currency, it will continue to intervene given the rise in speculative flows, so as to ensure the Rupee stands strong.
“We remain confident to withstand shocks with minimum pain amid heightened global uncertainties,” Malhotra said in the meeting.
Rupee continues to be worst performing Asian currency
The Indian rupee has been the worst performing Asian currency of 2026, having depreciated by more than 6% so far this year. On May 20, it touched a record low of 96.96 against the US Dollar.
Ahead of the RBI’s MPC meeting the local currency opened strong at 95.71 per dollar and rose to an intraday high of 95.64. Markets will now watch out for RBI’s media interaction for further cues on foreign investment inflows and currency.
