In a significant move aimed at strengthening India’s debt market and attracting greater foreign investment, the Government of India has promulgated the Income-tax (Amendment) Ordinance, 2026, granting a complete exemption from capital gains tax and interest income tax on investments made by Foreign Institutional Investors (FIIs) in government securities.
The decision comes at a crucial time when India is witnessing sustained foreign portfolio investment (FPI) outflows and increasing pressure on the Indian rupee due to global geopolitical uncertainties. By providing a favourable tax regime, the government seeks to make Indian sovereign debt instruments more attractive to overseas investors and improve capital inflows into the economy.
Cabinet Approves Tax Relief for Foreign Investors
The ordinance was approved by the Union Cabinet under the leadership of Prime Minister Narendra Modi and was officially published in the Gazette of India. The amendments have been given retrospective effect from April 1, 2026, ensuring that eligible foreign investors can benefit from the revised tax provisions from the beginning of the current financial year.
The amendment modifies the Income-tax Act, 2025, and introduces a comprehensive tax exemption framework for foreign investors investing in government securities.
Complete Tax Exemption on Interest Income and Capital Gains
Under the newly introduced provisions, Foreign Institutional Investors will no longer be required to pay tax on:
- Interest income earned from government securities.
- Capital gains arising from the sale, transfer, redemption, or exchange of government securities.
This represents a substantial shift in India’s taxation policy concerning foreign debt investments. Earlier, foreign investors were generally liable to pay withholding tax on interest income and capital gains tax on profits arising from the transfer of government bonds.
The exemption is expected to significantly enhance the post-tax returns available to overseas investors, making Indian government securities more competitive compared to debt instruments offered by other emerging markets.
Compliance Requirements for Availing the Benefit
While the tax exemption provides substantial relief, eligible investors will be required to comply with prescribed reporting requirements.
As per the ordinance, FIIs must furnish information in the manner and format prescribed by the government to claim the tax benefits. Detailed compliance guidelines are expected to be notified separately.
The government has clarified that only investors meeting the statutory definition of a Foreign Institutional Investor under Section 210(6)(a) of the Income-tax Act, 2025, will be eligible for the exemption.
Further, the term “Government Security” will carry the same meaning assigned under Section 2(f) of the Government Securities Act, 2006.
Tax Benefits Extended to Bank for International Settlements
Apart from FIIs, the ordinance also extends similar tax treatment to the Bank for International Settlements (BIS), a globally recognised international financial institution.
Accordingly, any interest income or capital gains earned by BIS from investments in Indian government securities will also be exempt from taxation in India.
This move reflects India’s intent to align its tax framework with international investment practices and encourage participation from prominent global financial institutions.
Why the Government Introduced This Measure
The ordinance comes against the backdrop of significant foreign capital outflows from Indian financial markets.
According to market data, net foreign portfolio investor outflows have reached approximately ₹2.47 lakh crore during the current calendar year, more than double the ₹1.04 lakh crore recorded during 2025.
At the same time, geopolitical tensions in West Asia, particularly the continuing Iran conflict, have contributed to volatility in global financial markets and increased pressure on emerging market currencies.
The Indian rupee also witnessed substantial weakness during the year, touching a record low against the US dollar before recovering partially with the support of RBI intervention and softer crude oil prices.
By removing tax barriers on investments in government securities, policymakers hope to attract long-term foreign capital and improve liquidity in the sovereign debt market.
Impact on India’s Debt Market
The tax exemption is expected to deliver several positive outcomes:
Increased Foreign Participation
Higher post-tax returns may encourage global investors to allocate a larger portion of their portfolios to Indian government bonds.
Lower Borrowing Costs
Greater demand for government securities can potentially reduce borrowing costs for the government by lowering bond yields over time.
Improved Market Liquidity
Enhanced foreign participation can deepen India’s debt markets and improve trading volumes.
Support for the Rupee
Additional foreign capital inflows may help stabilise the Indian currency and strengthen external sector resilience.
Enhanced Global Competitiveness
The measure places India’s sovereign debt market in a stronger position compared to competing emerging economies seeking international investment.
Conclusion
The Income-tax (Amendment) Ordinance, 2026 marks a significant policy initiative aimed at revitalising foreign investment in India’s government securities market. By exempting both interest income and capital gains from taxation, the government has addressed a longstanding concern of foreign investors and enhanced the attractiveness of Indian sovereign debt instruments.
As India continues to pursue economic growth amid global uncertainties, the move is expected to play a vital role in attracting stable foreign capital, strengthening the debt market, supporting the rupee, and improving overall investor confidence in the Indian economy.