FPI inflows into FAR securities rise by ₹8,795 crore after tax exemption

Govt on June 5 changed Income Tax Act via ordinance to exempt FPIs from tax on interest income and capital gains from trading in government securities, aiming to boost foreign inflows

Foreign portfolio investors (FPIs) have invested ₹8,794.743 crore in government securities under the Fully Accessible Route (FAR) after the government exempted them from income tax on interest income and capital gains arising from investments in these bonds.

According to data from the Clearing Corporation of India Ltd (CCIL), FPI holdings in FAR securities stood at ₹3.32 trillion on Tuesday, up from ₹3.23 trillion on June 3.

FAR allows non-resident investors to invest in specified Government of India dated securities without any investment ceilings.

"We can see the optimism from FPIs who nearly invested 75 per cent of the net purchase in G-secs under FAR category recorded during April & May. It also strengthens India's case for inclusion in major global bond indices, such as Bloomberg's sovereign bond index, whose inclusion decision was deferred earlier this year," said Mataprasad Pandey, vice-president at Arete Capital.

 

The government on June 5 promulgated an ordinance amending the Income Tax Act to provide tax exemption on interest income and capital gains arising from the sale, exchange or transfer of government securities held by FPIs. The exemption is applicable retrospectively from April 1, 2025.

The move came as the government looked to attract more foreign capital into the domestic debt market and support the rupee amid external pressures.

Currently, foreign investors are subject to a long-term capital gains tax of 12.5 per cent on listed shares and bonds held for more than 12 months, while interest earned on government bonds attracts a withholding tax of 20 per cent.

The Reserve Bank of India (RBI), in its June monetary policy announcement, also expanded the universe of securities available under the FAR by including all new issuances of 15-year, 30-year and 40-year tenor government securities.

The central bank also removed limits related to short-term investment, concentration and individual securities for FPI investments under the general route.

"These measures, along with the tax benefits, provided by the government this morning should help attract foreign capital for government borrowing," the RBI said during the monetary policy announcement.

The government securities market has been opened further to foreign investors through these measures as India seeks to deepen the bond market and facilitate greater participation from global investors.