Govt exempts foreign investors from tax on G-Sec interest, capital gains
Synopsis
India has wiped out capital gains tax and withholding tax on government securities for foreign investors in one sweeping ordinance — a structural shift designed to pull in pension funds, insurers, and sovereign wealth funds that long avoided Indian bonds over tax friction. With the rupee under pressure and the current account deficit widening, the Centre is betting that tax parity will do what rate differentials alone could not.
Key Takeaways
The Income-tax (Amendment) Ordinance, 2026 was issued on 5 June 2026 , effective 1 April 2026 .
FIIs are now exempt from LTCG tax (12.5%) on G-Secs held over 12 months and short-term capital gains tax (20%) on bonds held under a year.
A 20% withholding tax (TDS) on interest income from government bonds for foreign investors has been eliminated.
For FPIs under the General Route, three restrictions — short-term investment limit, concentration limit, and security-wise limit — will be removed; overall caps of 6% (Central G-Secs) and 2% (State G-Secs) remain.
The Bank for International Settlements (BIS) also receives the exemption, subject to prescribed information filings.
The move targets long-term investors such as pension funds , insurance companies , and sovereign wealth funds to support the rupee and reduce the current account deficit .
The Centre on Friday, 5 June 2026 issued the Income-tax (Amendment) Ordinance, 2026, granting foreign investors a full exemption from taxes on interest income and capital gains arising from investments in government securities (G-Secs). The ordinance, effective 1 April 2026, amends Schedule IV of the Income-tax Act, 2025, and is aimed at attracting stable, long-term foreign capital into India's bond markets.
What the Ordinance Changes
The amendment adds new entries to Schedule IV exempting Foreign Institutional Investors (FIIs) from tax on 'any interest on Government security, and any capital gains arising from the sale, exchange or transfer of such Government security,' subject to prescribed disclosure requirements. The same exemption has been extended to the Bank for International Settlements (BIS), conditional on information filings in prescribed forms.
Before this ordinance, FIIs faced a long-term capital gains (LTCG) tax of 12.5 per cent on G-Secs held for over 12 months and a short-term capital gains rate of 20 per cent for bonds held under a year. A withholding tax (TDS) of 20 per cent on interest income from government bonds has also been eliminated.
Easing of FPI Investment Restrictions
For Foreign Portfolio Investors (FPIs) operating under the General Route, the government will remove three existing restrictions: the short-term investment limit, the concentration limit, and the security-wise investment limit. The overall quantitative cap, however, remains — 6 per cent of the outstanding stock of Central Government securities and 2 per cent of State Government Securities (SGSs) — ensuring macro-prudential guardrails stay in place.
Why the Government Acted
Officials indicated the measures are designed to boost foreign capital inflows, curb outflows, support the Indian rupee, and help contain the widening of the current account deficit. The government expects the reforms to facilitate the development of a smooth yield curve and attract patient, long-term investors — including pension funds, insurance companies, and sovereign wealth funds — that have historically been deterred by India's tax treatment of bond income.
This comes amid broader efforts to deepen India's government bond market and increase its weight in global fixed-income indices, a process that gained momentum after JP Morgan included Indian G-Secs in its emerging-market bond index in 2024.
Market and Structural Impact
Analysts note that the removal of withholding tax and capital gains levies addresses one of the most frequently cited barriers by global institutional investors considering Indian sovereign debt. Notably, the ordinance route — bypassing the legislative calendar — signals the urgency the government attaches to stabilising capital flows. The move is the most comprehensive tax relief extended to foreign bond investors in recent memory, and sets the stage for potentially larger index inclusions and higher FPI participation in the coming quarters.
Point of View
Short-term gains tax, and withholding tax in a single instrument is aggressive — but the timing, via ordinance rather than the Budget, tells its own story about how urgently the Centre is watching the rupee and the current account. The real question is whether tax relief alone is sufficient: global bond investors also weigh settlement infrastructure, hedging costs, and currency convertibility. India has addressed the price of entry; the cost of participation remains a work in progress.
NationPress
11 Aug 2026
Frequently Asked Questions
What does the Income-tax (Amendment) Ordinance, 2026 do for foreign investors?
It exempts Foreign Institutional Investors (FIIs) from all taxes on interest income and capital gains arising from government securities, effective 1 April 2026. Previously, FIIs paid a 12.5% long-term capital gains tax, a 20% short-term capital gains tax, and a 20% withholding tax on G-Sec interest.
Which taxes on government securities have been removed for FIIs?
Three levies have been removed: the 12.5% long-term capital gains tax on G-Secs held over 12 months, the 20% short-term capital gains tax on bonds held under a year, and the 20% withholding tax (TDS) on interest income from government bonds.
What investment restrictions are being eased for FPIs under the General Route?
The government will remove the short-term investment limit, concentration limit, and security-wise limit for FPIs investing in G-Secs under the General Route. The overall quantitative caps — 6% of Central Government securities and 2% of State Government Securities — will be retained.
Why did the government issue this ordinance now?
The Centre acted to boost foreign capital inflows, reduce outflows, support the Indian rupee, and help contain the widening current account deficit. The ordinance route was chosen to implement the changes immediately, outside the regular legislative calendar.
Who are the intended beneficiaries of this tax exemption?
The primary beneficiaries are Foreign Institutional Investors (FIIs) and Foreign Portfolio Investors (FPIs), along with the Bank for International Settlements (BIS). The government specifically hopes to attract long-term, patient investors such as pension funds, insurance companies, and sovereign wealth funds.
