On 1 February 2025, Finance Minister Nirmala Sitharaman presented the Union Budget 2025 in the Indian Parliament, marking her eighth consecutive budget presentation and the second full budget under the third term of Prime Minister Narendra Modi’s Government. This makes her the first Indian Finance Minister to deliver eight consecutive Union Budgets. The 2025 Budget has extended investment deadlines and consequent tax reliefs to foreign investors, recognizing their key role in capital markets and foreign currency infusion into India.

Key amendments and clarifications enhancing the investment landscape for Foreign Portfolio Investors (FPIs) are summarized below.

Revised Taxation on long-term capital gains (LTCG) for FPIs: Beyond Listed Equities and Trust Units

The taxation landscape for FPIs has evolved, especially that regarding LTCG. Initially, from 1 April 2004, LTCG for FPIs on investments in listed equity shares, units of equity-oriented funds, and units of business trusts were exempt from tax. Whilst LTCG on these securities were made taxable from 1 April 2018, at a 10 percent rate, however the grandfathering provisions applied to investments held before 31 January 2018.

In the Full Budget 2024 presented on 23 July 2024, the holding period for classifying capital assets as long-term or short-term was rationalised, effective 23 July 2024, reducing it to 12 and 24 months respectively. Further, the tax rate on LTCG was increased to 12.5 percent from 10 percent across all categories of assets. However, an oversight left the LTCG for FPIs on securities other than equity shares, units of equity-oriented funds, and units of business trusts taxed at 10 percent instead of 12.5 percent. This was addressed in the current Budget 2025, increasing the tax rate on LTCG to 12.5 percent on all securities held by FPIs with effect from 1 April 2025. The Government accordingly ensured a comprehensive taxation framework for all FPI investments, reflecting its efforts to streamline taxation for foreign investors.

Sovereign Wealth Funds (SWF) and Pension Funds (PF) Investment Sunset Clause Extended

The India Budget 2025 focuses on infrastructure development as part of its "Viksit Bharat" vision. Viksit Bharat 2047 is the Indian government’s vision to drive the mission of making India a completely developed nation by its 100th anniversary of independence in 2047. To attract long-term capital from SWF and PFs, the Finance Act of 2020 introduced tax exemptions on dividends, interest, and LTCG from specified investments, held for three years, with a deadline for making investments up to 31 March 2024, which was previously extended up to 31 March 2025. To promote funding from SWFs and PFs in the infrastructure sector, the sunset clause for making specified investments by SWFs/ PFs to avail tax exemption is proposed to be extended by five years, until 31 March 2030.

Additionally, the Budget addresses an issue arising from an amendment made by the Finance (No.2) Act 2024 affecting SWFs and PFs. As per the amendment, all income from the transfer, redemption, or maturity of unlisted debentures and bonds was deemed as short-term capital gains (STCG), disqualifying SWFs and PFs from the LTCG tax exemption for said transfer. The new proposal allows LTCG (even if deemed STCG as per the per the provisions of the Income Tax Act, 1961), from investments in India to be excluded from total income, including STCGs on unlisted debt instruments under the SWF/PF exemption framework. This brings tax certainty to foreign investors to make substantial contribution to India’s infrastructure development.

IFSC Tax Exemptions Expanded for Non-Residents in Non-deliverable Forward (NDF) Contracts, Offshore Derivative Instruments (ODI), etc.

The issuance of Offshore Derivative Instruments (ODIs), or Participatory Notes (P-Notes) is expected to rise following Budget 2025 relaxations for entities in the International Financial Services Centre (IFSC). The Budget introduced tax exemptions for non-residents on income from transferring ODIs with FPIs in the IFSC, making it an attractive investment destination. These exemptions apply to non-residents' income on account of transfer of non-deliverable forward contracts, offshore derivative instruments, over-the-counter derivatives, and income distribution on offshore derivatives. Previously, exemptions were limited to income accrued or arisen to non-residents on account of transfer of these instruments or distribution of income on offshore derivative instruments entered only with an offshore banking unit in IFSC.

This move is expected to encourage offshore entities to shift their ODI operations to the IFSC. The new provisions offer greater tax certainty, effective 1 April 2025, and aim to revitalize the ODI market which has declined due to regulatory tightening. Prominent fund entities have already registered in IFSC, highlighting its growing appeal as an International Financial Centre. However, regulatory limitations on using derivatives as the underlying asset for ODIs and the requirement for separate FPI registration to issue ODIs may prove to be a deterrent factor.

Culmination of the Indian Government’s vision and foreign investors’ confidence in the Indian tax regime