The Income Tax Amendment Ordinance, 2026 introduces comprehensive tax relief for foreign investors in Indian government securities. According to reports from Personal Finance News, The Hindu BusinessLine, Mint, and The Economic Times, the ordinance grants complete tax exemption to Foreign Institutional Investors (FIIs) on income earned from government securities, covering both interest income and capital gains arising from the sale, transfer, redemption or maturity of such securities. The exemption applies to both Foreign Portfolio Investors (FPIs) notified as FIIs and the Bank for International Settlements (BIS). As per NDTV Profit, the ordinance was promulgated on June 5 and made effective retrospectively from April 1, 2026, addressing a long-standing concern among global investors that India's tax treatment of sovereign debt made government bonds less competitive compared with other emerging-market destinations. The gazette notification stated the ordinance was necessary as parliament was not in session and immediate action was required.
The new tax exemption provisions will take effect from April 1, 2026, as reported by Personal Finance News. This represents a significant shift from the previous taxation structure where interest income and capital gains from government securities were taxed under the FII taxation framework, with rates reaching as high as 20% on interest income, 30% on certain short-term capital gains and 12.5% on long-term capital gains. According to The Economic Times, the government had raised LTCG tax rate on most assets to 12.5% from 10% in the July 2024 budget, and foreign investors were subject to LTCG tax of 12.5% on listed shares and bonds held longer than 12 months, and withholding tax of 20% on interest earned on government securities. The decision comes at a crucial time when foreign investors have pulled out around ₹2.6 lakh crore from equities so far this year, putting pressure on the Indian rupee, with outflows significantly higher than the ₹1.66 lakh crore withdrawn in the entire 2025 due to geopolitical tensions.
According to the latest government data from The Hindu BusinessLine, ₹3,75,171 crore represents the total FII investment in government securities through both routes as of May 12, 2026. The General Route accounts for ₹54,091 crore, representing 0.83% of total FII holdings, while the Fully Accessible Route (FAR) contributes ₹3,21,080 crore, accounting for 6.74% of total FII holdings. Combined, these routes represent 3.34% of total FII investments in government securities. However, as reported by Mint, foreign investors have invested over ₹17,000 crore in the debt market through the Fully Accessible Route (FAR) this year, but they have withdrawn about ₹4,000 crore under the general debt limit and ₹340 crore through the Voluntary Retention Route (VRR) so far this year. The government aims to strengthen India's position in global bond markets, attract larger foreign inflows, and deepen participation in the domestic debt market through these comprehensive reforms.
As reported by Personal Finance News, Rajesh H. Gandhi, Partner, Deloitte India, stated that the complete tax exemption will increase returns for FPIs from investment in Indian G-Secs by 15-20% and improve the delta between returns on investment in Indian sovereign bonds compared to other countries. According to The Economic Times, Price Waterhouse & Co LLP partner Nehal Sampat said removal of this friction may also assist in the inclusion of government securities in global bond indices in a bigger way, which could eventually trigger more inflows into India. The exemption is expected to make India's inclusion in global bond indices more meaningful since tax was the key hindrance to the same, and FPIs investing only in Government securities will be free from any tax compliances such as return filing. According to The Economic Times, the reforms are aimed at reversing capital outflows and bolstering the rupee, which has taken a beating this year, with FPIs exiting to the tune of a net ₹2.47 lakh crore so far this year, more than double the ₹1.04 lakh crore they withdrew in calendar 2025, pulling down the rupee by as much as 6% in the period.
According to Personal Finance News, the Finance Ministry stated that the reforms are aimed at strengthening India's position as a global investment destination, attracting long-term foreign capital and improving ease of doing business for Foreign Portfolio Investors (FPIs) and Persons Resident Outside India (PROIs). The move is part of a broader set of measures to make it easier for foreign investors to invest in India's government securities and equity markets, with experts suggesting it should ease pressure on the rupee over the medium to longer term. As per NDTV Profit, the government has eliminated the withholding tax on interest income from government securities, which was generally subject to a 20% withholding tax until now, and has eliminated the 12.5% LTCG tax on long-term G-Sec gains for eligible foreign investors. The ordinance also specifically exempts investments by Basel-headquartered Bank for International Settlements (BIS) from LTCG and withholding tax on interest income on investments in G-Secs. A government official told The Economic Times that the exemption could mean investments to the tune of $7-11 billion in government paper by BIS, as the BIS, regarded as the central bank of central banks globally, had stayed away from Indian sovereign debt due to the levy of tax.
