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Govt Considers Slashing Withholding Tax from 20% to 5% Under Section 194LD to Boost FPI Inflows Amid Forex Pressures

EconomyHIGH
Target:UPSC GS-IIIMPSCBankingSSC GATeachingPrelims HighMains MediumStatic GK Link
15 May 2026
~2 min
Source: Indian Express
Key Data:Withholding tax 20%Proposed rate 5%Forex erosion $38 billionFPI debt outflows $613 million FY27FPI cap 6%Section 194LD I-T Act
Bodies:RBIGovernment of India
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What This Article Covers

1.The government is considering reducing the withholding tax on foreign portfolio investment interest income from 20% to 5% to revive capital inflows.

2.The concessional 5% rate under Section 194LD of the Income Tax Act expired in July 2023, reverting to a higher rate that deterred investors.

3.This policy shift is crucial for managing forex reserves, enhancing post-tax returns for FPIs, and supporting India's position in global bond indices.

The Big Picture
Prelims · HighMains · Medium

To arrest a $38 billion forex reserve drain and attract foreign capital, the government is considering a major tax reform: reducing the withholding tax (WHT) on FPI interest income from 20% back to 5%. This move aims to make Indian debt more attractive, especially after inclusion in global bond indices, and stabilise the external account.

Exam Lens

Quick Exam Facts From News

Withholding Tax (Current)20% (post July 2023 expiry)
Proposed WHT Rate5% (earlier concessional rate)
Forex Reserve Erosion$38 billion (since March 2026)
FPI Debt Outflows (FY27)$613 million (so far)
FPI Cap in G-Secs6% of outstanding stock (RBI limit)
Relevant I-T Act SectionSection 194LD

1-Minute Revision

  • ›Withholding Tax (Current): 20% (post July 2023 expiry)
  • ›Proposed WHT Rate: 5% (earlier concessional rate)
  • ›Target this Data: The concessional 5% withholding tax under Section 194LD expired in July 2023.
  • ›Target this Nodal Body: The Reserve Bank of India (RBI) sets the FPI investment cap in government securities (6%).
  • ›Target this Legal Point: Section 194LD of the Income Tax Act governs the concessional withholding tax on interest for FPIs.

Mastered this topic? Test your knowledge with a full MCQ quiz.

Practice exam-style questions, track your score, and strengthen your recall.

Q1Static LinkageEasy

Which institution is responsible for setting the investment cap for Foreign Portfolio Investors (FPIs) in government securities, as mentioned in the article?

Q2Statement-basedHard

Consider the following statements regarding the withholding tax (WHT) mentioned in the article:

1. It is a tax deducted at source on income earned by foreign investors from Indian bonds.

2. The concessional WHT rate of 5% under Section 194LD of the Income Tax Act is currently in force.

3. A high withholding tax is considered a deterrent for foreign capital inflows into India.

Which of the statements given above is/are correct?

Q3Data-centricMedium

According to the article, by how much had India's foreign exchange reserves eroded since March 2026, prompting the government's policy consideration?

Q4Application/ImpactMedium

What is the primary objective of the government's consideration to reduce the withholding tax rate on FPI interest income, as per the article?

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