In a significant policy move, the Government of India has promulgated the Income-tax (Amendment) Ordinance, 2026, granting complete tax exemption to Foreign Institutional Investors (FIIs) and the Bank for International Settlements (BIS) on interest and capital gains arising from investments in government securities (G-Secs).
The ordinance, which took effect retrospectively from April 1, 2026, was promulgated by President Droupadi Murmu as Parliament was not in session.
📜 Key Provisions of the Ordinance
The amendment introduces new entries — serial numbers 13D and 13E — in Schedule IV of the Income-tax Act, 2025, which provide the following reliefs:
Important Condition: The exemptions are strictly subject to the furnishing of information in the prescribed form and manner by the authorities.
Previously, foreign investors were subject to a 12.5% long-term capital gains tax on listed bonds held for over 12 months, along with a 20% withholding tax on interest income from government securities. With this ordinance, these income streams now attract a 0% tax rate.
The exemption applies to FIIs as defined under the Income-Tax Act, 2025, and extends to the Bank for International Settlements (BIS) — the international financial institution established in 1930 and headquartered in Basel, Switzerland.
🎯 Rationale Behind the Move
The government's decision comes at a time when the Indian rupee has been facing mounting depreciation pressure amid persistent foreign capital outflows from equities and high global commodity prices. The tax exemption is aimed at:
Attracting stable foreign capital into India's sovereign debt market to counteract pressure on the rupee;
Improving post-tax returns for overseas investors, thereby enhancing the attractiveness of Indian government bonds;
Broadening the investor base for government securities and facilitating India's inclusion in global bond indices;
Streamlining sovereign debt investment and fostering a more welcoming financial environment for global institutional capital.
💡 What This Means for Foreign Investors
The ordinance is a welcome step for foreign investors looking to diversify into Indian debt markets. Key takeaways include:
The relief covers both interest income and capital gains arising from such investments, and it is available to FIIs, as well as foreign portfolio investors (FPIs) notified as FIIs.
The measure is expected to boost long-term foreign capital inflows, support greater participation in Indian government securities, and enhance the appeal of Indian sovereign bonds in the global market.
📝 Summary
The Income-tax (Amendment) Ordinance, 2026 represents a strategic policy shift by the Indian government to attract foreign investment into its debt markets. By eliminating both interest and capital gains tax on government securities for eligible FIIs and the BIS — with retrospective effect from April 1, 2026 — India has significantly enhanced the post-tax returns for overseas investors. The move is expected to stabilize the rupee, deepen the sovereign debt market, and position India as a more attractive destination for global institutional capital.
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