Centre waives tax on FIIs' government bond income to attract long-term foreign capital
New Delhi, June 5
The Centre on Friday promulgated the Income-tax Ordinance, 2026, exempting Foreign Institutional Investors from paying tax on interest income and capital gains earned from investments in Government securities, a move aimed at attracting stable long-term foreign capital and deepening India's bond market.
The Ordinance, promulgated because Parliament is not in session, it amends Schedule IV of the Income-tax Act, 2025, and is deemed to have come into force from April 1, 2026.
According to the Gazette notification, a new entry has been inserted in the tax-exempt income schedule to provide that "any interest on Government security, and any capital gains arising from the sale, exchange or transfer of such Government security" earned by a Foreign Institutional Investor shall be exempt from tax, subject to furnishing prescribed information. A similar exemption has also been extended to the Bank for International Settlements (BIS).
The amendment is expected to strengthen overseas participation in India's sovereign debt market, particularly in longer-tenor government bonds.
Foreign investment in long-term Government securities provides a relatively stable source of capital that supports public spending and investment in sectors such as infrastructure, urbanisation, climate transition, manufacturing and social development.
Higher foreign participation can improve liquidity and price discovery in the Government securities market, making borrowing costs more efficient across the financial system.
Government securities serve as benchmark rates for pricing corporate bonds, bank lending and infrastructure financing, making the health of the sovereign bond market critical for broader financial-sector efficiency.
The government expects the measure to broaden the investor base for sovereign debt, increase competition in both primary auctions and secondary markets, and help compress term premia, thereby reducing the government's borrowing costs over time.
The tax exemption could further improve the attractiveness of Indian Government securities for global investors at a time when India is increasingly integrating with international capital markets.
The move follows a series of market-opening initiatives, including the Fully Accessible Route (FAR), which facilitated the inclusion of Indian Government securities in major global bond indices. Such measures have helped attract passive and long-term foreign capital while enhancing the credibility and global integration of India's domestic bond market.
The Ordinance defines a Foreign Institutional Investor as per the provisions of the Income-tax Act, while the term "Government security" will carry the meaning assigned under the Government Securities Act, 2006.
The exemption will be available subject to disclosure requirements and the furnishing of information in the manner prescribed by the government.
— ANI
Reader Comments
Great initiative! The inclusion in global bond indices has already shown positive results, and this tax exemption will only accelerate foreign participation. India's bond market needs depth and liquidity, and stable long-term capital from FIIs can help finance infrastructure projects. 🇮🇳
This is a double-edged sword. While FIIs bring capital, they can also be flighty. Remember the taper tantrum in 2013? Relying too much on foreign capital for government borrowing could make us vulnerable to global rate cycles. Need to balance this with domestic savings.
Interesting move from India. As an international investor, tax exemptions definitely make G-secs more attractive, especially with India's relatively high yields compared to developed markets. But regulatory clarity and ease of repatriation will also matter for long-term commitment.
Finally! We've been talking about deepening the bond market for decades. This will help bring down the government's borrowing costs, which means more money for welfare schemes. But I hope the RBI keeps an eye on currency volatility from these flows.
Question is - will this actually lead to more investment or just tax avoidance? FIIs already have various routes to invest. The government should also focus on improving the ease of doing business and legal framework. Tax sops alone won't solve structural issues.
M