G-Sec tax exemption: India waives FII levy in 2026

Ordinance clears tax on interest and capital gains

The Centre has issued the Income-tax (Amendment) Ordinance, 2026 to exempt select foreign investors from taxes linked to investments in government securities (G-Secs). The exemption covers both interest income and capital gains arising from the sale, exchange, transfer, redemption, or maturity of eligible government securities. The ordinance was promulgated on June 5 and is effective from April 1, 2026. That makes the benefit applicable retrospectively from the start of the current tax year. The government has positioned the move as a step to facilitate investment in Government securities and streamline the tax framework for eligible foreign investors.

Who is covered: FIIs, FPIs treated as FIIs, and BIS

The exemption applies to Foreign Institutional Investors (FIIs), and in practice it is expected to cover foreign portfolio investors (FPIs) registered with Sebi that are treated as FIIs under the Income-tax Act, 2025. The ordinance also grants the same tax exemption to the Bank for International Settlements (BIS), the Switzerland-headquartered institution that serves as a forum for global central banks. Government material also describes BIS as an international financial institution established in 1930 and headquartered in Basel, Switzerland. According to the government’s FAQ document referenced in the report, BIS has not yet invested in Indian government securities. Both FIIs and BIS must meet prescribed information-furnishing requirements to claim the benefit.

What the ordinance changes in the Income-tax Act

The ordinance amends Schedule IV of the Income-tax Act, 2025 by adding new categories of exempt income linked to investments in government bonds. Under the amendment, a new entry exempts “any interest on Government security, and any capital gains arising from the sale, exchange or transfer of such Government security” earned by an FII, subject to prescribed disclosure requirements. A separate entry provides the same exemption to BIS, again subject to furnishing information in a prescribed form and manner. Some coverage also refers to two new entries, 13D and 13E, being added to Schedule IV. The tax relief is framed as a targeted fiscal measure directed at specific institutional categories.

Effective date and the retrospective window

The ordinance is effective April 1, 2026. Official clarifications stated that the exemption applies to any capital gains and interest income received on or after April 1, 2026. Multiple reports described the change as retrospective because it applies from the beginning of the current tax year. A finance ministry statement said the exemption would apply to any interest or capital gains arising to FPIs on or after April 1 in respect of investments in G-Secs. The move was also linked in the reports to sustained pressure on the rupee and persistent foreign portfolio outflows.

What was taxed earlier and what is now scrapped

Before the ordinance, FIIs faced taxation on both interest income earned from government securities and capital gains arising from their sale or redemption. One report said FIIs had to pay 12.5 percent long-term capital gains (LTCG) tax on government bonds held for more than 12 months. It also stated a 20 percent short-term capital gains (STCG) tax rate if the bond was held for less than 12 months. Another set of government FAQs cited in the same material said that, in the absence of the proposed exemption, STCG on transfer of Government Securities by FIIs is taxable at 30% under section 210(1), while LTCG is taxable at 12.5% under section 210(1). The reporting also said the withholding tax on interest income earned by foreign investors on government securities has been eliminated, with a clarification that a notification would follow the ordinance to operationalise the withholding tax exemption.

How “Government security” is defined in the coverage

The ordinance links “Government security” to the definition under the Government Securities Act, 2006, as per the report. Separately, the government FAQ section included in the provided text states that under the Income-tax Act, 2025, “Government Security” shall have the meaning assigned in section 2(b) of the Securities Contracts (Regulation) Act, 1956. That section describes government security as a security created and issued by the Central Government or a State Government for the purpose of raising a public loan and having one of the forms specified in the Public Debt Act, 1944. The practical takeaway for investors is that the exemption is tied to a statutory definition, not an informal list of instruments. Investors and intermediaries will likely need to map securities to the relevant legal definition when applying the exemption.

Broader policy intent: inflows, rupee pressure, and current account

The government’s stated aim is to boost foreign capital inflows and stem outflows, to support the rupee and help contain the widening current account deficit. The finance ministry also said the exemption is meant to facilitate investment in Government securities and streamline the tax framework for eligible foreign investors. Reports described the measure as intended to deepen the domestic bond market by improving post-tax returns for global investors in India’s sovereign debt. The coverage also notes that the change is expected to align India’s taxation regime for sovereign debt more closely with global markets that offer favourable tax treatment to foreign investors. While the ordinance is focused on G-Secs, it is being discussed as part of a wider set of steps to improve ease of doing business for foreign investors.

FAR expansion and eligible routes for FII participation

Alongside the tax changes, authorities have widened the scope of government securities available under the Fully Accessible Route (FAR), including longer-tenure bonds and sovereign green bonds. One report said new 15-year, 30-year and 40-year government bonds, along with sovereign green bonds, have been included under FAR. The same material stated that this allows FPIs to invest in these securities without any investment cap on individual bonds covered under the route. Government FAQs cited in the text also said FIIs or FPIs may invest in Government Securities through the General Route and the Fully Accessible Route (FAR). Some reports also mentioned simplification steps such as removing certain restrictions under the government route and merging general and long-term FPI categories, while stating that overall foreign investment limits remain unchanged at 6 percent for central government securities and 2 percent for state government securities.

Key details at a glance

Market impact and why this matters for bond investors

For foreign investors, the immediate mechanical impact is on post-tax returns from Indian sovereign debt. By exempting both interest income and capital gains for FIIs and BIS, the government has removed two tax frictions that affect bond allocation decisions. For the market, the policy intent described in the reports is to attract foreign capital into the sovereign debt market during a period of rupee pressure and portfolio outflows. The measure may also change how investors compare India’s G-Sec returns to other markets, because the tax outcome is a key input in relative value and index-linked strategies.

The ordinance also formalises compliance requirements, because the exemption is conditional on prescribed disclosure and information filing. That matters operationally for FPIs, custodians, and intermediaries who will need to track eligibility and reporting. The clarification that withholding tax relief will be provided via a subsequent notification suggests there may be implementation steps that market participants will monitor. Separately, the expansion of FAR-eligible securities, including longer-tenure bonds and sovereign green bonds, broadens the set of instruments that foreign investors can access through that route.

Conclusion

India’s Income-tax (Amendment) Ordinance, 2026 exempts FIIs and BIS from tax on interest income and capital gains arising from investments in government securities, effective from April 1, 2026. The change removes previously applicable taxes cited in the reports, including long-term capital gains tax and withholding tax on interest, and is positioned as a measure to support inflows and reduce pressure on the rupee. The next operational step flagged in the clarifications is a notification to implement withholding tax exemption following the ordinance. Investors are also likely to watch how the prescribed information-furnishing requirements are notified and applied in practice.