- Indian government exempts tax on interest income and capital gains for foreign investors in G-Secs
- Income-tax (Amendment) Ordinance, 2026, effective retroactively from April 1, 2026, introduces the relief
- Foreign Institutional and Portfolio Investors no longer pay 12.5% LTCG tax on long-term G-Sec gains
In a landmark reform designed to make India's sovereign debt market far more attractive to global investors, the Indian government has announced a complete tax exemption on both interest income and capital gains earned by eligible foreign investors from investments in government securities (G-Secs).
The sweeping relief has been introduced through the Income-tax (Amendment) Ordinance, 2026, promulgated on June 5 and made effective retrospectively from April 1, 2026.
Under the new regime, Foreign Institutional Investors (FIIs) and Foreign Portfolio Investors (FPIs) will no longer pay long-term capital gains (LTCG) tax on listed government securities held for more than one year. Currently, such gains attract a 12.5% LTCG tax, making the exemption a significant incentive for overseas investors.
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In another major concession, the government has eliminated the withholding tax on interest income from government securities. Until now, interest earned on G-Secs was generally subject to a 20% withholding tax, unless reduced under applicable tax treaties.
With these changes, eligible foreign investors will enjoy a full tax exemption on both interest earnings and gains arising from the sale, transfer or exchange of government securities from April 1, 2026.
The benefit has also been extended to the Bank for International Settlements (BIS), the Switzerland-based institution widely known as the “central bank for central banks.”
According to the government, investors claiming the exemption will need to comply with prescribed information-reporting requirements.
The move addresses a long-standing concern among global investors that India's tax treatment of sovereign debt made government bonds less competitive compared with other emerging-market destinations. By removing key tax hurdles, the government aims to strengthen India's position in global bond markets, attract larger foreign inflows, and deepen participation in the domestic debt market.
The ordinance was issued because Parliament is not currently in session. As with any ordinance, it carries the force of law immediately but will require parliamentary approval to remain in effect.
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