* 10-year bond yield falls 3 bps to 7.73 pct
* India cuts withholding tax on govt, corp debt for foreigners
* Yields drop 22 basis points in April, biggest fall in 11 months
By Subhadip Sircar
MUMBAI, April 30 (Reuters) - Indian bond yields fell on Tuesday after the government said it would cut tax on interest income earned on debt by foreigners, a move that is expected to spur demand from overseas investors.
New Delhi will cut the tax on interest payments to foreigners on government and corporate debt to 5 percent from up to 20 percent for a two-year period, in a bid to draw further inflows to bridge its current account deficit and polish its reformist credentials.
"The move was a long-standing demand of foreign investors and will make Indian debt competitive with countries which have no such tax," said Sandeep Bagla, executive vice president at ICICI Securities Primary Dealership.
"It has come at a time when the traders were running less positions due to proximity to the policy."
The move came ahead of the central bank's annual policy review on Friday, where it is widely expected to cut rates by 25 basis points.
The benchmark 10-year bond yield fell 3 basis points (bps) to 7.73 percent. It traded in a band of 7.71-7.78 percent during the session.
Total volumes on the central bank's dealing platform stood at an above average 713.85 billion rupees.
Financial markets are closed on Wednesday for a holiday.
Yields fell 22 bps in April, the biggest fall in 11 months, largely on hopes of more central bank easing on falling commodity prices.
The government will resume its borrowing programme with a 150 billion rupee debt sale on Friday.
The near-end swap fell to a near 28-month low of 7.18 percent, before closing at 7.20 percent, down 1 bp on the day.
The five-year swap rate ended at 6.90 percent, down 3 bps from its last close. It had fallen to 6.88 during the session, a level last seen on July 25. (Editing by Subhranshu Sahu)