The government on Friday exempted foreign institutional investors (FIIs) and the Bank for International Settlements from capital gains tax on income earned from interest payments and the sale of government securities, in a move aimed at attracting more foreign capital into India’s debt market.
The decision comes at a time when the rupee has weakened more than 5% this year amid elevated crude oil prices and sustained foreign outflows from Indian equities.
The change has been brought through the Income-tax (Amendment) Ordinance, 2026, as Parliament is not currently in session. The ordinance, promulgated by President Droupadi Murmu, amends the Income-tax Act to make interest income and capital gains from specified government securities tax-free for eligible foreign investors, subject to prescribed conditions.
The exemption will take effect from April 1, 2026.
In simple terms, foreign investors who buy Indian government bonds will now get to keep a larger share of their returns.
Until now, they were subject to a 12.5% long-term capital gains tax on listed bonds held for more than a year, as well as taxes on interest income earned from government securities.
The government hopes the tax relief will make Indian government bonds more attractive to overseas investors and encourage greater participation in the country’s debt market.
Policymakers have been looking for ways to attract more stable foreign capital as rising oil prices, geopolitical tensions and foreign fund outflows have put pressure on the rupee and broader financial markets.
Analysts said the move could improve post-tax returns for foreign investors and help broaden the investor base for government securities. While the measure is unlikely to trigger an immediate surge in inflows, it could support foreign investment into Indian debt over the medium term and help cushion the economy against external shocks.
The decision is part of a broader effort to deepen foreign participation in India’s bond market. In recent years, the government has eased investment restrictions on certain government securities under the Fully Accessible Route (FAR), helping India secure inclusion in major global bond indices. The latest tax exemption is expected to further strengthen India’s appeal among international fixed-income investors.
Foreign investors have remained net buyers of Indian government debt this year, but have pulled billions of dollars out of domestic equities. By removing a key tax burden on government bonds, the Centre is betting that higher foreign participation in debt markets will help bring in fresh dollar inflows, support the rupee and provide a more stable source of capital for the economy.