The government slashed a tax on overseas borrowings by local companies on Friday, giving them access to cheaper funds and cheering investors as the government pressed on with reforms to revive economic growth.

Under the new rules, which were proposed in the budget for 2012/13 in March but not implemented so far, the withholding tax paid on interest on overseas borrowings by companies in India will be 5 percent, down from 20 percent earlier.

Interest rates are among the highest in India among big economies, and both industry and the government have been calling for a reduction in the cost of borrowing to revive growth in Asia's third largest economy.

Last week the government announced opening up of the country's vast supermarket sector as well as the airlines industries to foreign direct investment.

Also on Friday, the government said it was implementing a programme to attract retail investors into equity markets.

"Foreign currency borrowing will now become cheaper. It was long awaited as it was declared in the budget," said Satnam Singh, chairman of state-run Power Finance Corp (PWFC.NS), one of India's most active overseas borrowers.

Withholding tax of 20 percent added roughly 70 to 100 basis points to the cost of an overseas loan, so cutting that to 5 percent lowers the cost of borrowing by 50 to 80 bps, he said.

"Funding-starved sectors like capital goods, infrastructure companies, road developers should benefit," said Sandip Sabharwal, chief executive officer for portfolio management services at Prabhudas Lilladher.

The reduced tax will apply to funds borrowed between July 2012 and June 2015, Finance Minister P. Chidambaram told reporters.

Also on Friday, India implemented the Rajiv Gandhi Equity Savings scheme, which was first announced in the budget in March and promises tax incentive for first-time investors. The programme will include mutual funds and exchange-traded funds.

As part of the incentive, retail investors earning less than 1 million Indian rupees annually, would be eligible for a 50 percent tax deduction on investments up to 50,000 rupees.

Some financial stocks also rallied on hopes India will increase the foreign direct investment limit in insurance companies from the current 26 percent to 49 percent, although such a move would need parliamentary approval.

That could prove difficult as the government faces heavy opposition to its moves to open up supermarkets and raise the price of subsidised diesel. (REUTERS)