With JPMorgan including India in its emerging market bond index from June 2024 without any tax policy change, the government has made it clear that it has no plans to offer any tax incentive for the bond inclusion in other index providers FTSE Russell and Bloomberg as well.
“The bond inclusion in the JP Morgan index is an interesting development and we will watch it,” a government source said, adding that the settlement of the Indian sovereign bonds would flow through the normal FPI route and would have to be settled onshore in rupee.
In fact, the JP Morgan bond inclusion announcement came years after delays as the government of India was opposed to providing any capital gains tax waivers to overseas debt investors and wanted global bond index operators to settle Indian government securities locally if they were included in their indexes.
Currently, appreciation in bond prices is considered capital gains and subject to tax. Short-term (less than 12 months holding) capital gains are taxed as per the applicable slab rate of the investor while long-term capital gains are taxed at 10% without indexation and 20% with indexation.
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Chief Economic Adviser V Anantha Nageswaran said last week that estimates suggest that the G-secs inclusion could channelise $20-26 billion long-term foreign patient funds to India, relieving the Indian financial institutions from investing heavily in G-secs. It may also bring down the cost of capital for Indian bond markets, Nageswaran said.
Bond inclusion in global indexes will channelise more overseas debt funds into India relieving the Indian financial institutions from having to be one of the biggest buyers of subscribers to G-secs, and they could accelerate lending to more productive purposes, to the private sector or commercial sector or individuals.