The Indian government has exempted foreign institutional investors and the Bank for International Settlements from income tax on government securities [1].
This policy shift aims to attract greater dollar inflows into the Indian market by making government securities more appealing to international capital [1].
Under the Income-tax (Amendment) Ordinance 2026, foreign institutional investors (FIIs) and the Bank for International Settlements (BIS) are now exempt from paying income tax on interest and long-term capital gains earned from these securities [2]. The measure also removes withholding-tax obligations that previously applied to these entities [2].
The tax exemption is effective retrospectively from April 1, 2026 [2]. This means that eligible gains and interest earned since the start of the current fiscal period may be covered under the new rules [2].
Government securities, often referred to as G-Secs, are debt instruments issued by the Indian Treasury. By reducing the tax burden to 0% for these specific foreign entities [2], the government seeks to enhance the liquidity and attractiveness of its sovereign debt market [1].
The move signals a strategic effort to integrate more deeply with global financial markets. By removing the friction of capital gains and withholding taxes, India hopes to stabilize its currency reserves through increased foreign investment [1].
“The Indian government has exempted foreign institutional investors and the Bank for International Settlements from income tax on government securities.”
By eliminating taxes for FIIs and the BIS, India is positioning its sovereign bonds as a more competitive asset class compared to other emerging markets. This retrospective tax relief is designed to incentivize immediate capital entry and signal a pro-investor stance to global institutional managers, potentially lowering the government's borrowing costs over time.
