Union Budget 2022-23: Government to consider capital gains tax relief for global bond investors

In the upcoming Union Budget 2022-23, Finance Minister Nirmala Sitharaman is expected to consider a likely capital gains tax exemption for foreign debt securities ahead of the inclusion of India’s sovereign bonds in global bond indices, according to Economic Times.

India’s inclusion in the Bloomberg-Barclays and JP Morgan Emerging Markets Bond Indices will be a closely watched activity that should lead to increased REIT exposure to Indian government securities and thus overall government debt.

The inflows that should result are estimated at between 10 and 30 billion dollars per year. The move will lead to lower yields in India as global investors begin trading in some GOI stocks.

Capital gains tax on every bond transaction is likely to significantly affect liquidity, experts say. Currently, foreign investors are required to cough up short-term capital gains if the bond is sold within 12 months. Depending on the category of investors, this tax can be around 30 to 40%.

Capital gains tax exemption is the safest way to successfully list Indian debt on Euroclear, an international securities settlement platform. None of the countries listed in Euroclear impose capital gains tax on bond transactions.

Former chief economic adviser Krishnamurthy Subramanian, interacting with Bloomberg in July last year, said removing capital gains was key to getting on the platform.

The short-term capital gains tax is the final step for India to be listed on indices such as Euroclear followed by global investors. Platforms such as Euroclear are unable to calculate such a tax, which is seen as an obstacle to attracting global fund flows.

India’s inclusion in global bond indices will help reduce borrowing costs for the government.

According to data from Clearing Corporation of India, foreign bond investors could buy under the fully accessible route at Rs 16.98 lakh crore in 17 different maturities from 2024 to 2051.