In an effort to attract dollar inflows, the government has abolished long-term capital gains tax on investments made by foreign institutional investors (FIIs) in government securities through an ordinance issued on Friday.
The Income Tax Act has been changed to provide exemptions in the ordinance.
The government has decided to remove capital gains tax on government securities to attract long-term capital as these instruments have a long tenure.
This decision has come at a time when foreign investors have pulled out on a large scale. ₹So far this year, Rs 2.6 lakh crore has been received from equity, which is much more. ₹Due to geopolitical tensions, Rs 1.66 lakh crore was withdrawn in the whole of 2025.
Foreign investors withdrew in the first three days of June alone ₹An additional Rs 34,000 crore from equities is putting pressure on the rupee.
However, foreign investors have invested more ₹Rs 17,000 crore into the debt market through the Fully Accessible Route (FAR). However, they retreated ₹Rs 4,000 crore more under general credit limit ₹So far this year, Rs 340 crore has been raised through the Voluntary Retention Route (VRR) route.
At present, FIIs have to pay Long Term Capital Gains (LTCG) tax of 12.5 percent on profits made from equity and debt investments.
In the Union Budget presented in July 2024, the Finance Minister increased the LTCG tax rate on most properties from 10 percent to 12.5 percent. Meanwhile, as per Section 111A of the Income Tax Act, short-term capital gains (STCG) tax on listed stocks in India is 15 percent.
The rupee’s plunge to a record low has prompted authorities to step up efforts to arrest its decline, with Prime Minister Narendra Modi last month appealing to people to conserve foreign currency amid rising oil import costs due to the Middle East crisis.
The domestic currency is depreciating due to a number of factors including US trade tariffs, record foreign fund outflows and pressure from the rising import bill on the country’s treasury. RBI generally uses its foreign exchange reserves to prevent undue fluctuations in the value of the rupee against the dollar.
The rupee closed at a record low of 96.86 against the USD on May 20, 2026, 33 paise lower than its previous close.
The rupee, once counted among Asia’s more stable currencies, has now become one of the worst-performing emerging market currencies this year, under pressure from a toxic mix of expensive oil, capital outflows, a widening trade deficit and a rising US dollar.
It has depreciated by about 7 percent so far in 2026 and by about 6 percent since the Iran conflict began on February 28.
The rupee was priced at 89.94 against the dollar in early trade and closed at 89.98 on the first day of the calendar year.
India’s foreign exchange reserves declined by US$ 7.511 billion to US$ 681.384 billion during the week ended May 22.
The kitty had surged to an all-time high of US$728.494 billion during the week ended February 27 this year before the onset of the Middle East conflict, which led to several weeks of decline as the rupee came under pressure and the RBI had to intervene in the forex market through dollar sales.
India’s foreign exchange reserves stood at US$686.801 billion in the week ending January 2, 2026.
Separately, the Reserve Bank of India allowed some long-term sovereign notes to become fully accessible, allowing foreign investors to purchase them without limits. The last change in the list of government securities available under this route was in 2024, when the central bank removed 14-year and 30-year bonds.
