The Central government issued the Income-tax (Amendment) Ordinance 2026 on June 5, exempting foreign investors from paying taxes on interest income earned from government securities as well as on capital gains. As reported by Business Standard, the ordinance is effective April 1, 2026, making the benefit applicable retrospectively from the beginning of the current tax year. The ordinance was approved by the Union Cabinet chaired by Prime Minister Narendra Modi, who was satisfied that "circumstances exist which render it necessary... to take immediate action" as Parliament is not in session. The Income-tax (Amendment) Ordinance, 2026, promulgated by President Droupadi Murmu, amends Schedule IV of the Income-tax Act, 2025, to add new categories of exempt income linked to investments in government bonds. The decision ordinance is deemed to have come into force retrospectively from April 1, 2026, ensuring immediate applicability for eligible investors.
In a landmark reform designed to make India's sovereign debt market far more attractive to global investors, the Indian government has announced complete tax exemption on both interest income and capital gains earned by eligible foreign investors from investments in government securities (G-Secs). As reported by NDTV Profit, Foreign Institutional Investors (FIIs) and Foreign Portfolio Investors (FPIs) will no longer pay long-term capital gains (LTCG) tax at 12.5% plus applicable surcharge and cess on listed government securities held for more than 12 months, eliminating the previous 20% withholding tax on interest income from government securities. Additionally, the government has eliminated the withholding tax on interest income from government securities, which was generally subject to a 20% withholding tax, unless reduced under applicable tax treaties. Under the new regime, eligible foreign investors will enjoy a full tax exemption on both interest earnings and gains arising from the sale, transfer or exchange of government securities from April 1, 2026. The government has decided to remove the capital gains tax on G-secs to attract long-term, patient capital because these instruments have a longer tenure, as reported by Business Standard. A similar exemption has been extended to the Bank for International Settlements for its investments in G-Secs, with the exemption subject to furnishing prescribed information.
The government has implemented these measures to boost foreign capital inflows and curb outflows to support the rupee and help contain the widening of the current account deficit. As reported by Zee News, these moves are part of a broader strategy to attract stable systematic inflows of long-term, patient foreign capital, including long-term investors such as pension funds, insurance companies, and sovereign wealth funds. Ashima Goyal, Ex Member of MPC, RBI, noted that markets were concerned about India's balance of payments position, as the country has been running an overall deficit despite having strong foreign exchange reserves. As reported by NDTV Profit, "I think markets were nervous that is why they needed they needed something and this gives them something because although foreign exchange reserves remain very large. But for the last 2 years, we've been seeing that there's an overall balance of payment deficit. So, the fear was that they won't be there are not enough and large equity outflows." Goyal further mentioned that this has typically happened in the past whenever there has global risk aversion, "This time it has been a prolonged due to tariffs and oil shocks." The measure is seen as reassuring because it could attract more foreign inflows and help narrow the deficit. Additionally, as per Goyal, with the rupee currently undervalued in real terms, foreign investors could benefit both from tax incentives and potential gains if the currency appreciates. Radhika Rao, senior economist and executive director at DBS Bank, said, "the kind of the toolkit that could be used but the central bank and the government have rightly used everything that was announced essentially I think showing uh you know that all efforts you know all hands around deck in terms of wanting to attract inflows."
The RBI has expanded the Fully Accessible Route (FAR) by including all new issuances of 15, 30 and 40-year tenure government securities, significantly broadening access for foreign investors. As reported by The Economic Times, this move is expected to increase the attractiveness of India's sovereign debt market, particularly among long-term global investors such as pension funds, insurance companies and sovereign wealth funds. The expansion allows non-resident investors to invest in specified government bonds without being subject to investment caps, creating a more competitive environment for overseas participation in India's debt markets. Under the General Route, three key restrictions on FPI investments in G-Secs — short-term investment limit, concentration limit, and security-wise limit — have been removed. The overall quantitative caps remain unchanged and the sub-categories of 'general' and 'long-term' limits have been merged, according to Business Standard. For FPI investments under General Route, the government will remove the three restrictions, viz. short-term investment limit, concentration limit and the security-wise limit for investments by Foreign Portfolio Investors (FPIs) in G-secs, while retaining the overall quantitative investment limit of 6 per cent of the outstanding stock of the Central Government securities and 2 per cent of the State Government securities (SGSs).
According to official data, FPIs held about ₹3.75 trillion worth of government securities as of May 12, 2026, accounting for roughly 3.34% of the total outstanding stock. Of this, around ₹3.21 trillion was invested through the Fully Accessible Route (FAR), while approximately ₹54,000 crore was held through the general investment route. According to NSDL data, FPIs were net buyers in debt to the tune of ₹119 crore ($12.5 million) in June 2026 till June 3, while they pulled out ₹16,902 crore ($1,773 million) from equities during the period. The move comes amid sustained pressure on the rupee and continued foreign portfolio outflows, with foreign investors this year withdrawing almost ₹2.6 trillion from Indian equities, significantly higher than the outflows recorded in the whole of 2025. As reported by Business Standard, the exemption is expected to align India's taxation regime for sovereign debt more closely with several global markets that offer favourable tax treatment to foreign investors.
