Capital Gains Tax: Amid continuing concerns over the economy and in a major step to attract foreign investment, the government has decided to remove the capital gains tax imposed on foreign investors investing in Indian government bonds. Sources told India Today that this proposal has been approved by the Union Cabinet on Wednesday.

This approval is part of broader efforts to promote capital inflow, strengthen the rupee and protect the economy from the impact of the ongoing war in Iran and high crude oil prices. The Cabinet has also approved an ordinance to amend the Income Tax Act to implement these changes. This decision will be implemented after getting the approval of the President.

This step has been taken at a time when India is struggling with problems like record exit of foreign investors, pressure on the rupee and rising energy costs due to the long-running conflict in West Asia. According to the report, RBI had recommended the government to reduce tax on foreign bond investments.

What are the rules now?

According to current rules, foreign investors have to pay both short-term and long-term taxes on bond investments in India. Holding the bond for more than 12 months attracts 12.5% ​​long-term capital gains tax. At the same time, if selling in less than 12 months, heavy short-term capital gains tax of 30-40% has to be paid depending on the category.

Now after the ordinance, this capital gains tax on government securities will become completely zero. Earlier, foreign investors had to pay 20% withholding tax on the interest received. Now the government is working on a package to reduce or relax this 20% tax. This is the reason why many foreign investors used to maintain distance from the Indian bond market.

Impact on economy and rupee

Due to the war between America and Iran and global uncertainty, Rs 2.47 lakh crore has been sold from Indian markets so far this year. Due to this, the rupee has also fallen to a low level of 96.96. With the removal of tax, big funds (sovereign wealth funds and pension funds) at the global level can invest $ 10 billion to $ 30 billion (80,000 crore to 2.5 lakh crore) annually in India’s debt market. When foreign investors invest dollars in the market to buy Indian bonds, the inflow of dollars will strengthen. This is expected to strengthen the rupee.

fall in bond yields

Due to heavy purchasing, the yield (interest rate) of Government of India bonds will come down. Falling bond yield simply means that the government will have to pay less interest to raise the loan, which will also reduce the fiscal deficit.

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