Via an Ordinance last Friday, the government exempted foreign investors from paying tax on interest income and capital gains from government securities. The revised framework enhances India’s competitiveness as an investment destination for global fixed-income investors, writes Tejas Desai
l How does the Ordinance change the tax treatment of FPIs in G-Secs?
UNDER THE ORDINANCE 2026, a significant relaxation in the tax regime has been proposed for specified investment income streams. The government has granted a complete tax exemption on income earned by foreign portfolio investors (FPI) from their investment in government securities (G-Secs). Both interest income and capital gains on sale have been exempted.
Similar exemption has been granted to Bank of International Settlements (BIS).
Prior to the Ordinance, short-term capital gains were taxable at 30%, long-term capital gains at 12.5%, and interest income at 20%; in each case further subject to applicable surcharge ranging from 2% to 37% and health and education cess at 4%. Post the Ordinance 2026, these income streams would be fully exempt from tax, resulting in a 0% tax rate on short-term capital gains, long-term capital gains, and interest income.
l Are there any caveats to this relaxation in taxes?
AS A CAVEAT, since the capital gains would become exempt, any corresponding capital losses would neither be available for set-off nor eligible for carry forward.
Taxation regime for investment in corporate bonds remains unchanged; ie, both interest income and capital gains continue to be taxable under domestic law.
Foreign investors have long viewed taxation of gains on government securities as a friction point. Removing this tax should enhance India’s relative appeal within global fixed-income portfolios and attract stable, long-term foreign capital. The proposed changes are expected to materially improve post-tax returns for foreign investors and enhance the attractiveness of Indian debt investments.
These changes take effect retrospectively from April 1, 2026.
l How the changes interact with DTAA
CURRENTLY, UNDER CERTAIN Double Taxation Avoidance Agreements (DTAA) that India has with countries like Singapore, Mauritius, Netherlands, there is an exemption from capital gains on sale of debt securities (including government debt). Interest income is taxable under most DTAAs at a reduced rate; ie, less than 20% applicable under domestic law. Operationally too, it avoids the burden of having to claim tax treaty relief, which is often a fertile ground for litigation.
l India’s tax regime vs global peers
THE REVISED REGIME is broadly aligned with practices followed in several developed as well as emerging markets. These markets generally do not impose capital gains tax as well interest income. Accordingly, India’s revised framework enhances its competitiveness as an investment destination for global fixed-income investors.
l Likely broader economic impact
COMING ON THE back of India’s inclusion in major global bond indices and ahead of decisions on further index inclusion, the exemption is a logical next step in the evolution of the country’s debt markets. Further, tax exemption to BIS and its participation can encourage broader central-bank investment in Indian government debt.
l How does this improve returns for FPIs/FIIs?
FOR A GLOBAL portfolio manager comparing dozens of markets, even a 20-30 basis point improvement in expected post tax return can influence allocation decisions. The change makes India easier to explain to global investors and global investment committees. The Ordinance issued by the government to exempt income from investments in G-Secs by foreign portfolio investors is a pragmatic and market-friendly reform.
l How more foreign capital can come in
WHILE THE CAPITAL gains exemption marks a significant milestone, additional reforms could further strengthen the attractiveness of sustained foreign debt inflows into India. These measures may include maintaining a large stock of FAR (Fully Accessible Route)-eligible securities, improving secondary market liquidity, and reviewing the Securities Transaction Tax framework. Further, the development of more efficient currency hedging mechanisms, along with the continued evolution of GIFT City as a key financial hub, could enhance investor confidence and market participation. Reducing the withholding tax on interest earned from corporate bonds could also help in driving greater foreign investment into the debt market.
The writer is partner and financial services tax leader, EY India
Disclaimer: The views expressed are the author’s own and do not reflect the official policy or position of Financial Express.
