Indian government has issued the Income‑tax (Amendment) Ordinance, 2026, exempting Foreign Institutional Investors (FIIs) from paying taxes on interest income and capital gains arising from investments in government securities. Under the new regime, FPIs/FIIs will be exempt from interest income earned from G-Secs and capital gains arising from the sale, transfer, exchange or redemption of G-Secs.
The ordinance which is effective from 1 April 2026, amends Schedule IV of the Income‑tax Act, 2025, to add new entries exempting “any interest on Government security, and any capital gains arising from the sale, exchange or transfer of such Government security” earned by FIIs, subject to prescribed disclosure requirements.
The latest financial reforms is a timely and progressive move that can further strengthen India’s government bond market, Vineet Agrawal, co-founder of Jiraaf, told Zee News.
Prior to the latest reform, Foreign Institutional Investors (FIIs), including SEBI-registered Foreign Portfolio Investors (FPIs), were taxed under Section 210 of the Income-tax Act, 2025. Any income earned from investments in Government Securities (G-Secs) was subject to tax.
Specifically:
— Interest income earned on G-Secs was taxed at 20% for FIIs/FPIs.
— Short-term capital gains arising from the sale of G-Secs were taxed at 30%, depending on the nature of the transaction.
— Long-term capital gains were taxed at 12.5%.
— As a result, a portion of the returns earned by foreign investors from holding or trading G-Secs was payable as tax in India.
“For global investors, post-tax returns play a critical role in allocation decisions, and this step makes Indian sovereign debt more competitive among emerging market opportunities. We believe the announcement could accelerate foreign inflows into government bonds, especially as India’s inclusion in global bond indices has already increased international investor interest,” Agrawal said.
Higher FII participation is important because it can deepen liquidity, improve price discovery, and create a more stable demand base across the yield curve.
Agrawal added, while this may not lead to a direct shift from equities to bonds, it will encourage a more balanced view of Indian fixed income as a core portfolio allocation.
“For investors, bonds are increasingly emerging as a stable, income-generating asset class that can complement equities, particularly during periods of global uncertainty and market volatility,” he said.
