FPI tax exemption: G-Sec gains, interest tax-free 2026

What changed for FPIs in government securities

Foreign portfolio investors (FPIs) are set to receive full tax relief on income earned from Indian government securities, following a government move communicated alongside a broader Reserve Bank of India (RBI) push to attract foreign capital. The relief is being implemented through an ordinance. It is deemed effective from April 1, 2026, meaning it applies from the start of FY2026-27.

The exemption covers both interest income and capital gains arising from investments in government securities. Market participants described the change as effectively making returns from Indian government bonds tax-free for foreign investors on these instruments.

The tax relief package, in numbers

Two tax components that directly affect foreign investor returns on government bonds have been reduced to zero. First, long-term capital gains (LTCG) on government securities has been cut from 12.5% to nil. Second, withholding tax on interest income from government bonds has been cut from 20% to nil.

The intent, as described in the reporting, is to boost the attractiveness of Indian sovereign debt for global investors and encourage fresh capital inflows.

RBI’s parallel steps to widen the investible universe

The RBI announced multiple measures to attract foreign capital at a time when global uncertainty is elevated and the external sector is under pressure. RBI governor Sanjay Malhotra outlined initiatives intended to strengthen the balance of payments and provide support to the rupee.

A key move for bond markets was an expansion of the Fully Accessible Route (FAR). The RBI said it will include all new issuances of 15-year, 30-year, and 40-year government bonds during 2026 under the FAR, widening the set of securities that foreign investors can access.

Changes to the General Route for foreign investors

Alongside FAR expansion, the RBI removed multiple restrictions applicable to foreign investment in government securities through the General Route. Specifically, it removed restrictions related to short-term investments, concentration limits, and individual security exposure.

Taken together, these changes aim to reduce friction for FPIs allocating to Indian government securities and to broaden participation across maturities.

Rupee reaction after the policy announcements

The rupee strengthened after the RBI unveiled the measures. It gained 50 paise against the US dollar on Friday, strengthening to 95.24, as per the reported interbank market move.

Currency market participants attributed the improved sentiment to the package of steps aimed at easing investment norms for FPIs in government securities. The RBI also emphasised that India’s foreign exchange reserves remain strong enough to cushion the economy against external disruptions.

How much could FPI returns improve

The tax exemption is expected to lift the post-tax attractiveness of Indian government bonds for overseas investors. Rajesh H. Gandhi, partner at Deloitte India, said the tax exemption could raise FPI returns on Indian government bonds by 15% to 20%.

He also noted that the move could strengthen the case for global bond index participation and help ease pressure on the rupee over the medium to longer term.

Measures for NRIs, OCIs, and other persons resident outside India

Beyond bonds, the government and RBI also eased rules governing foreign investment in Indian equities. The RBI increased investment limits for Non-Resident Indians (NRIs) and Overseas Citizens of India (OCIs) in listed equity instruments that can be traded without SEBI registration.

The same facility will now be extended to all individual persons resident outside India, placing them at par with NRIs and OCIs. Separately, individual persons resident outside India (PROIs) will be allowed to invest in listed Indian equities through the Portfolio Investment Scheme (PIS), a facility that was earlier available only to NRIs and OCIs.

Investment caps under this route were also raised. The cap for an individual PROI under the scheme has been increased to 10% of a company’s paid-up capital from 5%, while the aggregate limit for all such investors has been raised to 24% from 10%.

Forex facilities: ECBs, FCNR(B) deposits, and export proceeds

The RBI announced a concessional foreign exchange swap facility for public sector undertakings until September 30, 2026, to encourage external commercial borrowings (ECBs) by these entities. A similar arrangement will be made available to authorised dealer banks, allowing them to fully cover hedging costs for fresh FCNR(B) deposits with maturities ranging from three to five years until September 30.

The RBI also proposed restoring the export proceeds realisation period to nine months from the current 14 months, as stated in the reporting.

Why policymakers are doing this now

The measures were positioned as a coordinated push by the government and the RBI to draw foreign capital into local debt markets and support the rupee amid persistent foreign portfolio outflows and rising global uncertainty. The package also comes at a time when geopolitical tensions, including the US-Iran conflict referenced in the reporting, are seen as putting pressure on India’s external sector resilience.

For bond markets, the combination of tax-free returns (via zero tax on interest and capital gains for FPIs from April 1, 2026) and easier access to a wider set of maturities is designed to increase foreign participation in government borrowing programmes.

Conclusion

India’s decision to exempt FPIs from tax on interest income and capital gains from government securities, effective April 1, 2026, is a significant shift in the post-tax return profile for overseas investors. The RBI has complemented this with expanded FAR eligibility, fewer General Route restrictions, and a set of forex and investment-rule changes spanning ECBs, FCNR(B) deposits, and equity access.

The next marker for markets will be how quickly foreign participation responds once the exemption takes effect from the start of FY2026-27, and how uptake evolves across newly eligible longer-tenor government bond issuances during 2026.