FPI tax relief brings India's bond market closer to global standards: EY

India's latest decision to exempt foreign portfolio investors (FPIs) from tax on income earned from government securities is a significant step towards bringing the country's bond market in line with global standards, according to Tejas Desai, Partner & Tax Financial Services Leader at EY India.

Desai said the move removes taxes on both interest income and capital gains earned by FPIs from government bonds. Earlier, investors had to pay tax on coupon income as well as gains made when selling government securities before maturity. "I think it's a significant relief," he said, describing the change as "a very market-friendly reform."

The reform is aimed at making Indian government bonds more attractive to overseas investors. According to Desai, many major international markets do not tax income from sovereign debt investments. "I think it's a step towards internationalisation of India's bond market," he said.

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Alongside the tax changes, the government has also implemented higher investment limits for Non-Resident Indians (NRIs) and Overseas Citizens of India (OCIs) under the Portfolio Investment Scheme. The objective is to encourage more overseas capital to flow into Indian markets.

The government is also trying to make it easier for foreign investors to access India. Desai said the idea is to simplify the investment process for individuals abroad who want exposure to Indian markets without going through extensive paperwork and registration requirements.

While the reforms widen the pool of potential investors, Desai expects the impact to build gradually. "It will be humble beginnings," he said, noting that attracting retail investors from overseas markets is typically a slow process.

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Still, he believes the measures show that India is preparing itself for future capital inflows. As global investment conditions improve, the country wants to be ready to attract more foreign money into both its bond and equity markets.

On concerns about investment limits being relaxed, Desai said existing monitoring mechanisms remain in place. Regulatory systems already track investments by FPIs, NRIs and other investors, and only the permissible limits have been recalibrated.

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