Income-tax Ordinance 2026: Zero tax on FPI G-secs

Ordinance takes effect from 1 April 2026

The Centre has issued the Income-tax (Amendment) Ordinance, 2026, providing a full tax exemption to foreign portfolio investors (FPIs) notified as foreign institutional investors (FIIs) on income from Indian government securities. The Ordinance is deemed to have come into effect from 1 April 2026, making the relief applicable retrospectively for the current tax year. It was published in the Gazette of India Extraordinary on June 5. The move changes the tax treatment of interest and capital gains from government securities, and is positioned as a measure to promote foreign investment and deepen participation in India’s sovereign debt market.

The stated intent is to boost liquidity in the bond market, attract global capital inflows, and strengthen India’s position in international financial markets. The package is also framed as part of a wider push to streamline investment norms and expand access routes for foreign investors in government bonds.

What the Ordinance changes in the Income-tax Act, 2025

The Ordinance amends Schedule IV of the Income-tax Act, 2025 by inserting two new entries in the exemption table: Serial Nos. 13D and 13E. These entries carve out specific tax exemptions linked to investments in “Government security”, with the Ordinance linking the term to the definition under the Government Securities Act, 2006.

The structure is simple: one exemption is for FIIs, and the other extends the same treatment to the Bank for International Settlements (BIS). The exemptions cover interest income and capital gains arising from transactions in government securities, subject to a reporting condition.

Entry 13D: tax exemption for FIIs on government securities

Serial No. 13D provides a complete exemption to a Foreign Institutional Investor on:

• Any interest on government securities, and
• Any capital gains arising from the sale, exchange, transfer, or redemption of such government securities.

The Ordinance describes the exemption as conditional on the submission of prescribed information to tax authorities. In operational terms, the procedural requirement is that FIIs must furnish information in such form and manner as may be prescribed.

The exemption applies to income arising on or after 1 April 2026. Because the Ordinance is retrospectively effective from that date, it ensures FII income from government securities in the current financial year is fully covered.

Entry 13E: similar exemption extended to BIS

Serial No. 13E extends the same exemption to the Bank for International Settlements (BIS), again for:

• Interest income from government securities, and
• Capital gains from transactions involving such securities.

Like FIIs, BIS must comply with mandatory reporting requirements to avail the exemption. The policy change is notable because it opens the door for the Basel-based institution to participate in India’s government securities market, including through structures like the BIS Investment Pool, which manages foreign exchange reserves for central banks globally.

Scope: listed and unlisted, Centre and states

A key detail in the Ordinance coverage is its breadth. The exemption applies to both listed and unlisted government securities. It also applies to both Central Government securities and State Government Securities (SGS). This wide scope matters because foreign participation in Indian sovereign debt can occur across tenors and issuances that are not always exchange-listed.

The only procedural condition highlighted is the disclosure and reporting requirement. The article information does not specify the final format, timelines, or forms, only that these will be prescribed.

Related measures: FAR expansion and eased investment norms

The Ordinance is presented alongside broader measures aimed at increasing foreign participation in government bonds. The cited reforms include expansion of the Fully Accessible Route (FAR) for FPIs in government bonds to longer tenors and sovereign green bonds, and removal of operational restrictions under the General Route.

The government has described the overall objective as reducing operational complexities and positioning India as a more competitive destination for long-term global capital. While the Ordinance itself is a tax measure, it sits within a wider set of steps designed to make entry, holding, and trading of government securities simpler for foreign investors.

What changed versus the earlier tax regime

Before this Ordinance, foreign investors faced taxation on both interest income and capital gains from government securities. The article notes two specific rates that were part of the earlier framework:

• Long-term capital gains on listed government securities were taxed at 12.5% if held for more than one year.
• Interest income from government securities attracted a 20% withholding tax.

The new exemptions remove these tax burdens for eligible investors in government securities. The article also states that withholding tax on interest income earned by foreign investors on government securities has been eliminated.

Market impact: liquidity, rupee pressure, and index relevance

The policy is positioned as an effort to attract stable overseas capital into India’s sovereign debt market at a time when the rupee has faced pressure and foreign flows have been volatile. By raising post-tax returns, the exemption is intended to improve the relative attractiveness of Indian government securities compared with other markets.

The article links the move to potential benefits in market functioning: greater foreign participation could improve liquidity in the secondary bond market, narrow bid-ask spreads, and improve price discovery. It also notes a policy rationale of diversifying the investor base beyond domestic banks and supporting a more resilient borrowing ecosystem.

The change is also described as relevant to India’s inclusion in global bond indices. Taxation is cited as a key hindrance, and removing this “friction” is framed as making index inclusion more meaningful for foreign investors.

What experts and officials said

A Deloitte India partner, Rajesh H. Gandhi, is quoted as saying the step could increase returns for FPIs from investment in Indian G-secs by 15-20% and improve the return differential versus other countries, making India more attractive. He also said it supports the case for global bond index inclusion, and added that FPIs investing only in government securities may be free from tax compliances such as return filing.

Separately, commentary in the article notes that exempting non-residents from capital gains tax on sovereign debt addresses a long-standing grievance that India taxes non-residents on sovereign debt flows.

Key facts at a glance

Why it matters for India’s sovereign debt market

The tax exemption is a direct policy lever because it changes foreign investors’ post-tax yield without changing the underlying bond coupon or price. With sovereign debt, small changes in effective returns can influence allocation decisions, especially for large global funds that compare net returns across markets.

By applying from 1 April 2026, the measure also reduces uncertainty for the current year’s income treatment for eligible investors. Along with steps like FAR expansion to longer tenors and sovereign green bonds, the changes are designed to remove barriers that can limit participation even when yields are competitive.

What to watch next

The exemption is subject to prescribed information and reporting requirements, so the next operational detail to watch is how the disclosure process is notified and administered. Market participants will also track how the wider package of eased investment norms is implemented for FPIs under FAR and the General Route, and whether participation broadens following the retrospective effective date.