Will FPIs get a tax boost? Government likely to announce relief soon

The government is working on a proposal to provide tax relief to foreign portfolio investors (FPIs), with the measure likely to be introduced through an ordinance, according to sources familiar with the development.

Sources said the proposal was discussed during the Union Cabinet meeting held on Wednesday and has received the necessary approval.

They added that the measure is now moving through the legal process before being sent to the President for assent. Once the approval is obtained, the Revenue Department, under the Ministry of Finance, is expected to issue the formal notification. According to sources, the notification could be issued by the end of this week.

FIIs Dump Stocks

FIIs will remain in focus as their positioning in the derivatives market has weakened further. Their long positions in index futures have dropped to around 8.5 per cent, the lowest level since mid-January, and have remained below the 10 per cent mark for the second consecutive session.

Foreign investors sold nearly Rs 5,600 crore worth of shares in the cash market in the previous session, while their combined selling across cash equities and index futures exceeded Rs 11,000 crore.

However, a significant portion of the latest cash market selling was driven by two large block deals involving Lenskart and GMR, which together accounted for around Rs 4,800 crore. On the other hand, domestic institutional investors (DIIs) provided support by purchasing shares worth about Rs 5,740 crore.

The broader trend has also remained weak. According to depository data, Foreign Portfolio Investors (FPIs) pulled out Rs 32,963 crore from Indian equities in May, marking the third straight month of net selling. Total FPI outflows from the equity market have now crossed Rs 2.24 lakh crore so far this year.

Focus on attracting foreign capital

The proposed changes aim to make India a more attractive destination for foreign capital and to encourage greater participation by overseas investors in domestic financial markets. Sources said the government has been examining various options to address concerns raised by FPIs regarding the existing tax framework.

They said the immediate focus of the proposal is on investments in bonds and other fixed-income instruments. As per the discussions, long-term capital gains (LTCG) tax exemption for certain bond investments by FPIs is being considered for a specified period.

Sources indicated that discussions were also held on extending similar tax benefits to equity investments. However, they cautioned that no final decision has yet been taken on whether equities will be included in the ordinance.

Equity tax relief still under consideration

According to sources, the possible impact of granting LTCG exemption on equity investments was also analysed during the Cabinet discussions. The government is understood to be assessing the potential implications for capital flows and tax revenues before taking a final call.

Sources further said the proposal comes at a time when foreign investors have remained net sellers in the Indian equity market. Policymakers are believed to be exploring measures that could improve investor sentiment and attract fresh overseas investments into both debt and equity segments.

They said several rounds of consultations have taken place over the past two to three weeks involving senior government officials and market participants. According to sources, discussions have been held at multiple levels, including within the Finance Ministry and the Prime Minister's Office, while feedback from FPIs and industry representatives has also been considered.

Why the government is opting for the ordinance route

Sources said the ordinance route is being adopted because Parliament is not currently in session. Under the legislative process, changes related to taxation generally form part of the Finance Bill and require parliamentary approval. An ordinance allows the government to implement such measures immediately, subject to subsequent approval by Parliament.

They added that once the ordinance receives the President's assent, it will be sent back to the concerned departments for implementation, following which the Revenue Department will issue the necessary notification.

According to sources, the ordinance will remain valid until it is placed before Parliament, where it can be replaced by legislative amendments through the normal law-making process.

Final details awaited

Sources said it remains unclear whether the government will introduce tax relief for both debt and equity investments simultaneously or adopt a phased approach by initially focusing only on bonds.

They noted that if only bond-related measures are included in the ordinance, equity-related proposals could later be brought through the Finance Bill during the upcoming Monsoon Session of Parliament.

Market participants are closely tracking the development, as any reduction in tax burden for foreign investors could potentially improve the attractiveness of Indian financial assets and support capital inflows.

However, sources maintained that the final contours of the proposal, including the exact scope of the tax relief and the categories of investments that will qualify, will become clear only after the official notification is issued. The government has not made any formal announcement on the matter so far.