Withholding Tax
Context:
The Government of India is considering reducing the withholding tax on interest earned by foreign investors from Indian government bonds to attract greater foreign capital inflows.
The proposal comes amid concerns over depreciation of the rupee, foreign capital outflows, and the need to make India’s bond market more attractive and globally competitive.
About the Tax
Withholding tax is a tax deducted at source on interest income earned by foreign investors from investments in Indian government securities.
At present, foreign investors pay nearly 20% withholding tax on interest earned from Indian government bonds, which is considered relatively high compared to global standards.
The proposed reduction in withholding tax aims to increase foreign investment in India’s bond market and improve liquidity in government securities.
Higher foreign investment can help:
Stabilise the rupee,
Strengthen foreign exchange reserves,
Reduce government borrowing costs,
And support infrastructure financing.
The proposal gains importance as Indian government bonds have recently been included in major global bond indices, which is expected to increase foreign investor participation in India’s debt market.