Govt exempts foreign investors from tax on interest, capital gains on G-Secs
New Delhi, June 5
The central government on Friday issued the Income‑tax Ordinance, 2026, exempting foreign investors from paying taxes on interest income and capital gains arising from investments in government securities.
The ordinance, effective April 1, 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 Foreign Institutional Investors (FIIs), subject to prescribed disclosure requirements.
The same exemption was also extended to the Bank for International Settlements (BIS), conditional on information filings in prescribed forms.
The move exempts FIIs from a long‑term capital gains tax (LTCG) of 12.5 per cent on government bonds held for over 12 months and a short‑term capital gains rate of 20 per cent for held less than a year.
It also eliminated withholding tax on interest income earned by foreign investors on government securities. Previously, they had to pay a withholding tax (tax deducted at source) of 20 percent on interest income from government bonds.
For FPI investments under General Route, the government will remove the three restrictions, viz. short-term investment limit, concentration limit and the security-wise limit for investments by Foreign Portfolio Investors (FPIs) in G-secs, while retaining the overall quantitative investment limit of 6 per cent of the outstanding stock of the Central Government securities and 2 per cent of the State Government securities (SGSs).
These measures will help in development of a smooth yield curve, and attract stable systematic inflow of long-term, patient foreign capital, including long-term investors such as pension funds, insurance companies, and sovereign wealth funds.
The government made these moves to boost foreign capital inflows and curb outflows to support the rupee and help contain the widening of the current account deficit.
— IANS
Reader Comments
I support the idea of attracting foreign capital, but waiving all taxes? That's a big revenue loss for taxpayers like us. Could have at least kept a small LTCG tax of 5-7% instead of completely exempting them. We bear the burden of our own taxes while foreign investors get free rides!
This is actually great for our economy! 💰 With capital flowing in, our bond yields will stabilize and the government gets cheaper borrowing costs. And removing those silly limits on short-term investments and concentration - very sensible reforms. Let's hope it works and the rupee firms up!
This is a double-edged sword. While it might bring foreign funds, we're basically giving away tax revenue to global players. And what about the common man's savings in PPF and other instruments? The government should ensure domestic investors also get similar benefits. Let's see how this plays out...
The Indian government is being proactive in integrating global capital markets. This ordinance makes India a more attractive destination for fixed income investors. With the removal of pointless restrictions, we'll see more long-term, patient capital from sovereign wealth funds. Smart policy during a challenging global environment.
Still not convinced waiving taxes will magically solve the rupee's problems. What happens when these foreign investors suddenly decide to pull out? We're creating dependency on hot money. Should've focused more on boosting exports and manufacturing first. But let's hope I'm wrong and this works! 🤞
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