The Centre is likely to ease tax rules for foreign portfolio investors (FPIs) investing in Indian government securities, with the proposed changes expected to be brought through an ordinance amending tax provisions, according to sources.
The proposal could provide tax relief to foreign investors holding specified government securities. A notification is expected after the necessary approvals are completed.
The move is aimed at attracting overseas capital into India's debt market and supporting foreign inflows amid heightened uncertainty following tensions in West Asia.
While the government has not yet disclosed the exact contours of the proposed changes, FPIs currently pay a 12.5% long-term capital gains (LTCG) tax on listed government securities held for more than 12 months. Interest earned on government bonds is also subject to a 20% withholding tax under the domestic tax regime, although lower rates may be available under tax treaties.
Market participants have since sought a more competitive tax framework, arguing that lower tax costs could improve India's appeal as a destination for global debt capital.
Why the ordinance route matters
An ordinance is a temporary law enacted by the government when Parliament is not in session and immediate legislative action is considered necessary. Once promulgated, it has the same force as an Act of Parliament and takes effect immediately. However, it must be approved by Parliament within six weeks of the commencement of the next session, failing which it lapses. The government may also withdraw an ordinance before it expires.
Any tax relief for FPIs would ultimately require corresponding amendments to the Income Tax Act. The ordinance route allows the government to implement changes quickly while seeking parliamentary approval at a later stage.
Details of the proposed relief are awaited.
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