India just made its bond market a lot more hospitable for overseas money. And overseas money noticed.

After the Indian government scrapped taxes on foreign portfolio investors holding government securities, June 2026 recorded net inflows of approximately $1.84 billion (around 35,000 crore rupees) into Indian bonds. That’s the highest monthly figure in 16 months.

What India actually changed

The policy overhaul, announced via ordinance in early June, eliminated two taxes that had long been a drag on foreign appetite for Indian debt.

First, the 12.5% long-term capital gains tax on government securities, gone. Second, the 20% withholding tax on interest income for eligible foreign investors, also gone. Both exemptions were applied retroactively from April 1, 2026, meaning investors who had already parked money in Indian bonds this fiscal year got the benefit too.

The combined effect of scrapping both levies could boost foreign portfolio investor returns on government securities by 15-20%, according to analyst estimates. That’s a meaningful edge when you’re stacking Indian paper against bonds from Brazil, Indonesia, or South Africa.

On top of the tax changes, the government also moved to lift ownership caps on certain bonds for foreign investors, meaning more room for overseas capital to flow in without bumping against regulatory ceilings.

The market reaction was immediate

A 14-basis-point drop in the 10-year government security yield right after the policy announcement followed the news. Yields move inversely to prices, so a 14-basis-point decline means existing bondholders saw their holdings appreciate meaningfully overnight.

Why India did this now

The Indian rupee had been under pressure. When foreign investors pull money out of equities and don’t replace it with fixed-income allocations, the currency suffers. Attracting bond inflows is a direct way to support the rupee without burning through foreign exchange reserves.

There’s also the global index angle. JPMorgan began including Indian bonds in its Government Bond Index-Emerging Markets in 2024, but broader and deeper inclusion in other global debt benchmarks requires certain conditions, including accessible tax treatment and minimal ownership restrictions. By removing both tax barriers and cap constraints simultaneously, India is essentially checking boxes on the wish list of index providers.

What this means for investors

The immediate implication is straightforward: Indian government bonds just became significantly more competitive on an after-tax return basis. A 15-20% improvement in net returns changes the math for any portfolio allocation model comparing emerging-market sovereign debt.

For traders watching the rupee, sustained bond inflows would provide a meaningful support floor for the currency, reducing the Reserve Bank of India’s need to intervene in foreign exchange markets.