The PM Narendra Modi government Monday exempted from income tax the interest payable on rupee-denominated bonds issued outside India by a company or a trust to a non-resident or a foreign company, a move aimed at increasing dollar inflow.

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The interest would be exempt on rupee-denominated bond issued outside India during the period from September 17, 2018, to March 31, 2019, the Finance Ministry said in a statement.

As per I-T law, interest payable by an Indian company or a business trust to a non-resident, including a foreign company, on rupee-denominated bond issued outside India before July 1, 2020, was liable for concessional rate of tax of 5 per cent.

Consequent to Prime Minister Narendra Modi reviewing the state of economy last week, the government had announced a multi-pronged strategy to contain the current account deficit (CAD) and augment the foreign exchange inflow.

In this background, low cost foreign borrowings through off-shore rupee denominated bond have been further incentivised to increase the foreign exchange inflow, the ministry said.

"It has been decided that interest payable by an Indian company or a business trust to a non-resident, including a foreign company, in respect of rupee-denominated bond issued outside India during the period from September 17, 2018 to March 31, 2019, shall be exempt from tax, and consequently, no tax shall be deducted on the payment of interest in respect of the said bond under section 194LC of the (Income Tax) Act," the ministry added.

Legislative amendments in this regard shall be proposed in due course, it added.

The government has already announced five steps to arrest rupee depreciation and deal with current account deficit, including removal of withholding tax on Masala bonds, relaxation for foreign portfolio investments, curbs on non-essential imports.