FPI inflows into govt bonds jump to ₹35,000 crore in June after tax exemption; holdings rise to ₹3.58 lakh crore

Foreign Portfolio Investors (FPIs) have pumped nearly ₹35,000 crore into Indian government bonds so far in June, marking a sharp acceleration in overseas debt inflows after the government exempted foreign investors from income tax on interest income and capital gains arising from investments in select sovereign securities.

Data from the Clearing Corporation of India Ltd (CCIL) showed that the entire inflow was directed towards government securities eligible under the Fully Accessible Route (FAR), a framework that allows non-resident investors to invest in designated government bonds without any investment caps.

Tax relief triggers surge in foreign demand

FPI holdings in FAR securities rose to ₹3.58 lakh crore as of Tuesday, compared with ₹3.23 lakh crore on June 3, indicating net inflows of around ₹35,000 crore within weeks of the government's tax-relief announcement.

The latest inflows mark a significant jump from ₹5,512.11 crore in May and ₹5,262.02 crore in April. In contrast, foreign investors had pulled out ₹17,687.99 crore from the segment in March amid global market volatility and uncertainty around capital flows.

The turnaround follows the government's decision on June 5 to promulgate an ordinance amending the Income Tax Act.

Under the amendment, FPIs have been granted exemption from tax on interest income as well as capital gains arising from the sale, exchange or transfer of specified government securities. The exemption has been made effective retrospectively from April 1, 2025.

RBI widens access to sovereign debt market

The tax incentive was accompanied by additional measures from the Reserve Bank of India aimed at making India's bond market more attractive to global investors.

In its June monetary policy announcement, the RBI expanded the pool of securities available under the FAR mechanism by including all new issuances of 15-year, 30-year and 40-year government securities.

The central bank also relaxed restrictions relating to short-term investments, concentration limits and individual security exposures for FPI investments under the General Route.

"These measures along with the tax benefits provided by the government this morning should help attract foreign capital for government borrowing," the RBI had said during the policy announcement.

Push to deepen bond market

The latest measures are part of a broader effort to deepen India's debt market and increase foreign participation in sovereign bonds. The government moved to provide tax relief at a time when it was seeking to attract overseas capital and support the rupee amid global economic uncertainties.

Before the amendment, foreign investors were subject to a 20% withholding tax on interest income from government bonds, while long-term capital gains on listed bonds attracted a 12.5% tax when held for more than 12 months.