In a skittish global economy, policy integrity is the anchor that secures long-term investment. Unfortunately, by removing the long-term capital gain tax exemption for Sovereign Gold Bonds purchased in the secondary market, this year’s budget flirts with an old and troubling pattern: unilaterally renegotiating terms after investors have committed capital.
This approach is particularly risky as we are aggressively courting global manufacturers to “Make in India” with the promise of sizeable incentives. For any serious investor, an incentive is only as valuable as the certainty that it will exist tomorrow; without that trust, no amount of fiscal grease can offset rising sovereign risk.
The Economic Survey released just days before the budget, aptly labelled last year a ‘year of paradox’. On paper, India is a macroeconomic star, with GDP growth estimated at 7.4 per cent. Yet this stellar performance has failed to translate into capital stability.
The data is a wake-up call: net FDI has collapsed by a staggering 9 per cent, from $38.6 billion in FY22 to a mere $0.4 billion in FY25. While gross inflows remain resilient, the surge in repatriations suggests that early investors are cashing out their India bets rather than doubling down on India’s future potential.
So, as capital flees despite robust growth, it signals that the India premium is being eroded by a policy surprise risk, and investors are no longer willing to take the risk.
It is in this context that the shift in Sovereign Gold Bond (SGB) taxation becomes an avoidable misstep. Understanding why requires stepping back to the scheme’s origins. Launched in November 2015, SGBs were designed with a dual purpose: to channel household savings in gold into the formal financial system while simultaneously reducing India’s dependence on imported physical gold — a chronic drag on the current account.
To make the offering competitive against physical gold, the government engineered a compelling tax architecture. Under Section 47 of the Income Tax Act, 1961, any capital gains arising from the redemption of an SGB at maturity were exempt from capital gains tax. Layered on top was a fixed annual interest rate of 2.5 per cent, payable semi-annually — a return unavailable to holders of physical gold. These features, taken together, were the sovereign’s deliberate and advertised promise: a safe, liquid, and tax-efficient alternative to gold bars and jewellery.
Critically, neither the SGB Scheme nor Section 47(viic) drew any distinction based on how an investor acquired the bond. The exemption was tethered exclusively to the act of redemption at maturity. Over time, this gave rise to a vibrant secondary market, with bonds listed and freely traded on stock exchanges. For many retail investors, purchasing on the secondary market was in fact the most accessible route into the instrument. They did so on the explicit understanding that the same maturity exemption applied to them, an understanding that the government not only permitted but actively encouraged by listing SGBs on exchanges as a liquidity feature of the scheme.
But by inserting the phrase “subscribed to at the time of original issue” into the Finance Bill 2026, the government has retroactively narrowed a decade-old promise. With effect from April 1 (today), secondary market buyers who hold their bonds to maturity will no longer qualify for the capital gains exemption.
By introducing a new criterion nearly ten years after the bonds first came to market, the government has effectively altered a sovereign promise already in circulation. But more importantly, it sends a chilling signal that the fine print on a government bond is subject to unilateral renegotiation, leading investors to ask: what stops the government from doing the same with any other incentive or promise?
This is a road we have been down before and have suffered for it. The trajectory of India’s Special Economic Zones (SEZs) is one cautionary tale. Launched in 2005, these zones initially saw exports surge from $5 billion in FY06 to $76 billion by FY12 — a 57 per cent CAGR that made the zones extremely successful in the early years. However, this momentum was derailed by successive policy reversals, notably the curtailment of tax holidays and the retrospective imposition of Minimum Alternate Tax (MAT) and Dividend Distribution Tax (DDT).
The fallout was immediate: export growth collapsed to just 8 per cent, mirroring the national average. Today, with 28% of notified SEZ land lying unutilised, the message is clear: while incentives can lure in some capital, only the sanctity of the original contract will keep investment coming.
Further, the decade-long battles involving firms like Vodafone and Cairn Energy — widely recognised as symbols of retrospective ‘tax terrorism’ — are other examples of broken policy promises that cost India a generation of investor trust.
While the present government wisely moved to scrap retrospective tax in 2021, the spirit of that era seems to be resurfacing in a rising tide of tax litigation. For instance, on January 15, 2026, the Supreme Court ruling on Tiger Global has established that a Tax Residency Certificate (TRC) is no longer a conclusive shield for treaty benefits — opening the doors for administrative overreach. By shifting the burden of proof to establish commercial substance onto the taxpayer, the ruling has brought under scrutiny every offshore structure used to invest in the country.
When combined with the budget’s reversal on SGB, the message to a global investor is clear: in India, your investment returns are never truly settled.
Hence, if India wants to accelerate investment, we must recognise that an investor’s memory is longer than a government’s budget cycle. Reversing the FDI collapse will require more than incentives; it requires treating the contractual sanctity of every scheme as an immutable national commitment. In cases where the government wants to make changes to existing commitments, we must codify the principle of “grandfathering” — ensuring that return expectations of investors are not disrupted by a sudden legislative shock.
Further, we need clear, objective criteria for interpreting treaty benefits to act as a firewall against administrative overreach. Ultimately, we cannot afford to view sovereign promises as flexible. Without absolute policy integrity, India risks remaining a country that is high on potential, but simply too risky to invest.
The authors are Team Lead and Senior Team Lead, respectively, at the Delhi-based policy think-tank Foundation for Economic Development.
The opinions expressed in this article are those of the author/s and do not purport to reflect the opinions or views of THE WEEK.