The government on Friday announced a major tax relief for foreign institutional investors (FIIs) by exempting them from paying taxes on both interest income and capital gains arising from government securities.
Effective from April 1, 2026, the measure is expected to make Indian sovereign debt more attractive for global investors by improving post-tax returns and simplifying the tax treatment of such investments.
The decision also comes at a time when foreign investors have pulled out around ₹2.6 lakh crore from equities so far this year, putting pressure on the Indian rupee. The outflows this time were way higher than ₹1.66 lakh crore withdrawn in the entire 2025 because of geopolitical tensions, Mint reported earlier.
What has changed in taxation rules for FIIs?
Under the Income Tax Amendment Ordinance, 2026, the government has granted a full tax exemption on income earned from government securities by FIIs. The relief covers both interest income and arising from such investments and it is available to FIIs, as well as foreign portfolio investors (FPIs) notified as FIIs. The same relief has also been extended to the Bank of International Settlements (BIS).
Before this exemption was introduced, both interest income and capital gains from government securities were taxed under the. Foreign investors had to pay 12.5% long-term capital gains tax (LTCG) on government bonds that were held for more than 12 months. If the bond is held for less than 12 months, then 20% short-term capital gains tax was applicable.
Both these taxes, as well as the withholding tax on interest income earned by foreign investors on government securities has also been eliminated by the government to attract investments in the country’s sovereign bond market.
What does the move mean for investments in India’s sovereign securities?
Commenting on the development, Rajesh. H. Gandhi, Partner at Deloitte India said, “This will increase the returns for FPIs (foreign portfolio investors) from investment in Indian G-Secs by 15-20% and improve the delta between returns on investment in Indian sovereign compared to other countries thereby making India a bit more attractive.”
He also added that the step makes India’ s inclusion in the global bond indices more meaningful since tax was the key hindrance to the same. Additionally, FPIs investing only in government securities will also be free from any tax compliances such as return filing and others.
“The move should ease pressure on the rupee over the medium to longer term,” he said. The Indian rupee has depreciated about 7% so far in 2026 and is down roughly 6% since the outbreak of the US-Iran conflict on February 28, 2026.
Can Government Securities be listed or unlisted?
Government securities may be listed on a recognised stock exchange in India (such as NSE and BSE) or may remain unlisted. Most actively traded Central sovereign securities are listed on the exchanges.
How do FIIs invest in government securities?
FIIs and FPIs can invest in Indian government securities through two primary channels:
- General Route
- Fully Accessible Route (FAR)
Foreign investors have invested over ₹17,000 crore in the debt market through Fully Accessible Route (FAR). However, they withdrew about ₹4,000 crore under the general debt limit and ₹340 crore through the Voluntary Retention Route (VRR) so far this year, according to PTI report.