India's latest financial reforms are designed to attract stable, long-term foreign capital into the country's sovereign debt market, with the government introducing sweeping changes to Foreign Portfolio Investor (FPI) participation in Government Securities (G-Secs), according to an official fact-sheet released on Saturday, 6 June. The measures span tax exemptions, expanded investment routes, and simplified norms — collectively the most significant overhaul of the G-Sec access framework in recent years.

Tax Exemptions for FPIs from April 2026

Prior to these reforms, Foreign Institutional Investors (FIIs), including SEBI-registered FPIs, were taxed under Section 210 of the Income-tax Act, 2025 on any income earned from G-Sec investments. Recognising that a competitive tax environment is essential to attract global capital, the government has now introduced a full tax exemption for FPIs and FIIs investing in G-Secs.

Under the new framework, FPIs and FIIs will be exempt from tax on interest income earned from G-Secs, as well as on capital gains — whether long-term or short-term — arising from the sale, transfer, exchange, or redemption of G-Secs. The exemption applies to income arising on or after 1 April 2026, and has been enacted through the Income-tax (Amendment) Ordinance, 2026, according to the official statement.

Fully Accessible Route Expanded to Long-Duration Bonds

The government has also broadened the list of securities eligible under the Fully Accessible Route (FAR), which allows unrestricted foreign investment in select G-Secs. The expanded FAR now includes new issuances of 15-year, 30-year, and 40-year Government Securities, as well as Sovereign Green Bonds (SGrBs) issued in FAR-eligible tenors.

This expansion is aimed at deepening participation across the maturity spectrum and encouraging foreign investors to take positions in long-duration sovereign instruments — a segment historically dominated by domestic institutional buyers such as insurance companies and provident funds.

Investment Limits Simplified, Caps Retained

To reduce friction for foreign investors, the government has removed three specific sub-limits that previously constrained FPI activity: the short-term investment limit, the concentration limit, and the security-wise investment limit. However, the overall investment ceilings remain unchanged — 6 per cent of the outstanding stock of Central Government Securities and 2 per cent of the outstanding stock of State Government Securities (SGSs).

Additionally, the existing 'General' and 'Long-Term' FPI investment categories will be merged into a single investment limit for both Central and State Government Securities, streamlining the regulatory framework and reducing compliance complexity for foreign investors.

Why These Reforms Matter

Greater foreign participation in India's G-Sec market is expected to improve market liquidity and price discovery, support the development of a smoother yield curve, and reduce government borrowing costs over time. The reforms also aim to strengthen financial market benchmarks and enhance the transmission of monetary policy across the broader economy.

Notably, the influx of stable foreign capital is expected to provide supplementary funding for India's large-ticket priorities — including infrastructure, manufacturing, urban development, and climate initiatives. This comes amid sustained efforts by the Centre to deepen India's capital markets and position the country as a more accessible destination for global fixed-income investors.

What Happens Next

With the tax exemption effective from 1 April 2026 and the FAR expansion already in place, market participants will be watching for early signals of increased FPI inflows into the long-duration sovereign bond segment. The rationalisation of investment sub-limits is likely to ease portfolio allocation decisions for foreign fund managers, potentially accelerating India's integration into global bond indices.