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4 Jun 2026Economy3 questions

India to Drop Capital Gains Tax for Foreign Investors in Government Bonds

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Article summary

India is planning to eliminate capital gains tax on government bonds for foreign investors, a move aimed at deepening foreign participation in its sovereign debt market. India's benchmark 10-year bond yield eased one basis point to 7.01% on the news, reflecting positive market sentiment. This proposal follows India's inclusion in global bond indices such as JPMorgan's Government Bond Index-Emerging Markets (GBI-EM) in 2024, which had already triggered significant foreign inflows into Indian government securities. Removing capital gains tax would further reduce the effective cost of holding Indian bonds for overseas investors, making them more competitive relative to peers like Indonesia and Brazil. For India, this translates into lower borrowing costs for the government, greater liquidity in the bond market, and stronger integration with global capital markets, all of which are critical for financing infrastructure and fiscal deficit management.

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recallTests whether you read the article and retained key facts.
1Q
applicationTests whether you can apply the concept to a new scenario.
1Q
analysisTests whether you can reason across multiple related facts.
1Q

Sample questions — answers revealed after test

EconomyRecallEasy

Q1. India's inclusion in which of the following global bond indices in 2024 has been a key strategic context for the proposed removal of capital gains tax on government bonds for foreign investors?

AJPMorgan's Government Bond Index – Emerging Markets (GBI-EM)
BFTSE Russell's World Government Bond Index (WGBI)
CBarclays Global Aggregate Bond Index
DMSCI Emerging Market Bond Index
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EconomyApplicationMedium

Q2. India proposes to eliminate capital gains tax on government bonds for foreign portfolio investors (FPIs). Which of the following sequences correctly captures the chain of macroeconomic effects this reform is most likely to trigger?

AHigher FPI demand for G-Secs → Bond yields compress → Government borrowing cost falls → Fiscal space for capital expenditure expands
BHigher FPI demand for G-Secs → Bond yields rise → Rupee appreciates → Current account deficit widens
CLower tax revenue from FPIs → Fiscal deficit widens → Government increases market borrowing → Bond yields rise
DHigher FPI demand for G-Secs → Crowding out of private investment → Private credit growth contracts → GDP growth slows
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EconomyAnalysisHard

Q3. Consider the following statements regarding India's proposed removal of capital gains tax on government bonds for foreign investors: 1. Such a waiver would require either an amendment to the Income Tax Act, 1961, or a specific exemption notification under Section 10 of the Act. 2. Foreign investors who already claim lower tax rates under Double Taxation Avoidance Agreements (DTAAs) would receive no additional benefit from the domestic capital gains tax waiver. 3. The reform is intended to complement India's inclusion in JPMorgan's GBI-EM index by attracting active fund managers, not just passive index-tracking funds. 4. A reduction in government bond yields following increased FPI inflows would worsen the fiscal deficit by reducing returns to domestic retail investors in small savings schemes. Which of the statements given above are correct?

A1 and 3 only
B1, 2 and 3 only
C2 and 4 only
D1, 3 and 4 only
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