India Waives Tax On Foreign Investors' G-Sec Earnings: What The Move Means For Bond Markets & Capital Flows | Explained
· Free Press Journal
Mumbai: The Government of India has issued the Income-tax (Amendment) Ordinance, 2026, offering a major tax benefit to Foreign Institutional Investors (FIIs) and the Bank for International Settlements (BIS).
Under the new rules, income earned from Indian government securities (G-Secs) through interest payments and capital gains will be exempt from tax. The decision is expected to make India's bond market more attractive to global investors.
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What Are Government Securities (G-Secs)?
Government securities, commonly called G-Secs, are bonds issued by the government to raise money for public spending.
India Scraps Long-Term Capital Gains Tax On Foreign Investors In Govt BondsThe funds are used for infrastructure projects, railways, defence expenditure and development programmes. Investors who buy these securities effectively lend money to the government and receive regular interest payments in return.
Expansion of the Fully Accessible Route (FAR)
The government has also expanded the scope of the Fully Accessible Route (FAR).
New 15-year, 30-year and 40-year government bonds, along with sovereign green bonds, have been included under FAR. This means foreign portfolio investors (FPIs) can invest in these securities without any investment cap on individual bonds covered under the route.
The move is expected to encourage greater foreign participation in India's debt market.
Rupee & Stock Market Rally After Tax Relief Buzz, Government May Cut Bond Investment Tax For Foreign InvestorsWhat Income Will Be Tax-Free?
The ordinance provides exemption on two types of earnings:
Interest Income
Any interest earned by eligible FIIs from government securities will not be taxed.
Capital Gains
Profits earned from selling, transferring or exchanging government securities will also be tax-free.
This is the most significant feature of the new ordinance as it improves post-tax returns for foreign investors.
Who Will Benefit?
The tax relief is available only to:
- Foreign Institutional Investors (FIIs)
- Bank for International Settlements (BIS)
Govt Considers RBI Proposal To Cut Taxes On Foreign Investments In Domestic Bonds To Support RupeeThe BIS, headquartered in Basel, Switzerland, is often referred to as the 'central bank of central banks' and plays an important role in the global financial system.
Other Regulatory Changes
To simplify investment rules, the government has removed several restrictions under the government route, including:
- Short-term investment limits
- Concentration limits
Security-wise limits
The government has also merged the general and long-term FPI categories to make compliance easier.
However, overall foreign investment limits remain unchanged at 6 percent for central government securities and 2 percent for state government securities.
Why Is This Important for India?
Global investors typically compare post-tax returns before making investment decisions.
By removing taxes on G-Sec earnings, India becomes a more competitive destination for foreign capital. Higher foreign participation can improve liquidity in the bond market, help the government raise funds more efficiently and deepen the country's debt market.
Income-Tax Rules 2026 Rejigged, Simpler Filing From April OnwardsThe ordinance was issued under Article 123 of the Constitution as Parliament was not in session. Although announced on June 5, 2026, it will take effect retrospectively from April 1, 2026, covering eligible income earned during FY27.
For India, the move is seen as a significant step towards integrating its bond market more closely with global capital markets and attracting long-term foreign investment.