Athira Sethu
Kochi, 6 June 2026
The Income Tax Amendment Ordinance, 2026 of the Indian government states that there will be a tax benefit to foreign investors. Such measures will help make investments in India government securities more attractive to foreign investors.
It means that FIIs and FPIs are now not liable to pay any income tax in relation to interest earned from government securities. Additionally, they are exempted from tax payment for capital gains, irrespective of whether they are short or long term. It applies when they sell, transfer, redeem, and hold such securities till maturity. The new rule will come into effect from April 1, 2026. BIS has also been granted similar tax exemption as the other two.
Previously, foreign investors paid various taxes on income earned from government securities. The interest income was taxable up to 20%, certain short-term capital gains were taxable up to 30%, while long-term capital gains were taxable at 12.5%. All these taxes decreased foreign investors’ earnings.
This will result in India becoming an increasingly popular location for foreign investors as well as ease their processes of doing business in India.
It is expected that this decision would result in an improvement in the gains made by foreign investors from the bonds issued by the Indian government. According to the analysis done by Rajesh H. Gandhi of Deloitte India, the gains of the foreign investors can be expected to rise by 15-20% as now they would not have to pay any of these taxes. This could increase the competitive edge of Indian government bonds as compared to other bonds issued by other countries.
Also, the foreign investors investing solely in government securities will be saved from having to follow many of the tax-related procedures in India. The most common ways through which foreign investors invest in government securities are the General Route and the Fully Accessible Route (FAR). As on 12 May, 2026, the total amount of foreign investments made into the government securities in India was ₹3.75 lakh crore.
In conclusion, this tax exemption will definitely encourage more foreign investments in the Indian Government Bonds and boost the foreign investment flows to India which will improve India’s standing in international financial markets and be beneficial for the Indian economy in the long run.
