In a significant move to bolster India’s appeal as an investment destination, the Union Cabinet on Wednesday approved the scrapping of capital gains tax on investments in government securities by Foreign Portfolio Investors (FPIs).

The decision, taken at a Cabinet meeting chaired by Prime Minister Narendra Modi on Wednesday, will be implemented through an ordinance amending the Income Tax Act.

The government has chosen the ordinance route to fast-track the relief measure, bypassing the need to wait for a parliamentary session. A formal notification is expected to be issued by this week, government sources told ANI

Under the existing tax framework, foreign investors are liable to pay 12.5 per cent Long Term Capital Gains (LTCG) tax on listed shares and bonds held for more than 12 months.

The exemption on government securities is expected to significantly improve the yield attractiveness of Indian sovereign debt for overseas investors, who have long flagged the tax as a deterrent.

Government sources indicated that Wednesday’s decision is not a standalone step. Further measures are being planned to encourage capital inflows into India and to cushion the economy against the cascading effects of the ongoing West Asia conflict, which has rattled global financial markets and supply chains in recent months.

The move comes at a time when global investors are reassessing emerging market exposures amid geopolitical uncertainty.

By removing the capital gains burden on government securities, New Delhi is signalling its intent to deepen the participation of foreign capital in its sovereign bond market, a step that could also support the rupee and help manage India’s borrowing costs.