India exempts foreign investors from tax on government securities
What's the story
The Indian government has issued the Income-tax (Amendment) Ordinance, 2026, offering tax relief to foreign institutional investors (FIIs) on interest income and capital gains from investments in government securities. The ordinance amends the Income-tax Act, 2025, and has been made effective from April 1, 2026. The move, aimed at attracting foreign capital and deepening India's debt market, comes amid a weakening rupee, foreign investor outflows, and economic uncertainty triggered by the US-Iran conflict in West Asia.
Exemption conditions
Bank for International Settlements also included in the exemption
The ordinance mandates eligible investors to provide information in a specified format and manner to avail of the tax exemption. The same tax treatment has also been extended to the Bank for International Settlements (BIS). This means any interest income or capital gains earned by BIS from transactions in government securities will also be exempted from taxation under this new ordinance.
Entity definition
Definition of eligible entities added
A new Note 4 has been added to define the entities eligible for the tax exemption. The amendment clarifies that "Foreign Institutional Investor" will have the meaning assigned under Section 210(6)(a) of the Income-tax Act, 2025. It also states that "Government security" will have the same meaning as defined in Section 2(f) of Government Securities Act, 2006. This move is expected to make India's sovereign debt market more attractive to foreign investors by removing tax burdens on government securities investments.
Capital boost
Aims to boost foreign investments in India
The tax exemption is seen as a major step toward boosting foreign capital inflows and reducing outflows. The Finance Ministry has said that the move is aimed at facilitating investment in government securities and simplifying the tax structure for eligible foreign investors. This comes after India witnessed massive FPI outflows of ₹2.47 lakh crore since January, more than double the ₹1.04 lakh crore withdrawn in 2025.