The Centre on Friday issued the Income-tax (Amendment) Ordinance, 2026, granting Foreign Institutional Investors (FIIs) exemption from tax on interest income and capital gains earned through investments in government securities. The move is aimed at attracting stable long-term foreign capital and strengthening India’s bond market.

Since Parliament is currently not in session, the Ordinance was promulgated to amend Schedule IV of the Income-tax Act, 2025, with retrospective effect from April 1, 2026. As per the Gazette notification, the amendment introduces a new provision under the tax-exempt income category, stating that any interest earned on government securities, along with capital gains arising from their sale, transfer, or exchange by FIIs, will be exempt from tax, provided the required disclosures are submitted. The same benefit has also been extended to the Bank for International Settlements (BIS).

The measure is expected to encourage greater foreign participation in India’s sovereign debt market, particularly in long-term government bonds. Stable overseas investments in government securities can support public expenditure and investments across sectors such as infrastructure, urban development, climate transition, manufacturing, and social welfare.

Increased foreign investment is also likely to enhance liquidity and improve price discovery in the government securities market, helping make borrowing costs more efficient across the financial system. Since government bond yields act as benchmark rates for corporate borrowing, bank loans, and infrastructure financing, a stronger sovereign debt market is considered vital for overall financial-sector efficiency.

The government believes the exemption will diversify the investor base for sovereign debt, boost competition in primary auctions and secondary markets, and gradually lower borrowing costs by compressing term premia. The decision further strengthens the appeal of Indian government securities among global investors as India deepens its integration with international capital markets. It follows earlier reforms such as the Fully Accessible Route (FAR), which enabled the inclusion of Indian government bonds in major global bond indices and helped attract long-term passive foreign investments. The definition of Foreign Institutional Investor will follow the provisions of the Income-tax Act, while “government security” will carry the meaning assigned under the Government Securities Act, 2006. The exemption will apply subject to prescribed disclosure and reporting requirements.

Disclaimer: This image is taken from ANI.