India's government on 5 June 2026 promulgated the Income-tax (Amendment) Ordinance, 2026, exempting foreign institutional investors, including foreign portfolio investors (FPIs), and the Bank for International Settlements from tax on interest income and capital gains from government securities (G-Secs).
The exemption applies to income arising on or after 1 April 2026. Before the change, interest income earned by FPIs on G-Secs was taxed at 20%, short-term capital gains at 30% and long-term capital gains at 12.5%, according to a government backgrounder published on 6 June. The ordinance, issued while Parliament was not in session, amends the Income-tax Act, 2025.
WIDER ACCESS TO THE BOND MARKET
The Reserve Bank of India said on the same day, alongside its monetary policy decision, that new issuances of 15-, 30- and 40-year government securities would be included in the Fully Accessible Route (FAR), which allows foreign investors to buy designated G-Secs without the restrictions that apply under the General Route. The government said sovereign green bonds in FAR-eligible tenors would also be included.
Short-term, concentration and security-wise investment limits under the General Route have been removed, while the overall limits remain at 6% of outstanding central government securities and 2% of state government securities, the government said. As of 12 May 2026, FPIs held G-Secs worth ₹3,75,171 crore, or 3.34% of the ₹112.42 lakh crore outstanding, with ₹3,21,080 crore held through the FAR.
GOVERNMENT RATIONALE
The government said the reforms aim to attract stable long-term foreign capital, deepen the G-Sec market and broaden the investor base. It said greater foreign participation would improve market liquidity and price discovery, reduce government borrowing costs and attract long-term institutional investors such as pension funds, insurance companies and sovereign wealth funds. The measures were introduced amid foreign portfolio investor outflows from Indian markets.