Tax Exemption Proposed for FPIs on Government Securities

The Government of India has introduced a significant tax relief measure for Foreign Portfolio Investors (FPIs) and Foreign Institutional Investors (FIIs) investing in specified Government Securities. The move is aimed at enhancing the attractiveness of Indian sovereign debt markets and encouraging stable foreign capital inflows.

Key Highlights of the Proposal

As per the Income-tax (Amendment) Ordinance, 2026, promulgated on 5 June 2026, the following tax benefits have been introduced for eligible FPIs/FIIs investing in specified Government Securities:

• Interest income earned from specified Government Securities may be exempt from income tax.
• Capital gains arising from the sale, exchange, or transfer of such securities may also be exempt from tax.
• The exemption is available subject to prescribed conditions and reporting requirements.
• The provisions are effective from 1 April 2026.

What Has Changed?

Prior to this amendment:

• Interest earned by foreign investors on Government Securities was generally subject to withholding tax.
• Capital gains arising from the transfer of Government Securities were taxable under the applicable provisions of the Income-tax law.

Under the new framework, eligible FPIs/FIIs investing in notified Government Securities may not be required to pay tax on either interest income or capital gains, resulting in improved post-tax returns on investments.

Objective Behind the Measure

The Government has introduced this relief with the objective of:

• Attracting long-term foreign capital into India's debt market.
• Increasing participation in Government Securities.
• Broadening the investor base for sovereign debt.
• Supporting financial market stability and capital inflows.

Conditions for Availing the Exemption

The tax exemption is not automatic. Eligible investors will be required to:

• Satisfy the prescribed eligibility conditions.
• Furnish information and disclosures as may be prescribed by the tax authorities.
• Comply with applicable regulatory and reporting requirements.

Effective Date

The exemption applies to eligible interest income and capital gains arising on or after 1 April 2026 in respect of investments in specified Government Securities.

Conclusion

The proposed tax exemption for FPIs and FIIs investing in Government Securities represents a significant policy initiative aimed at strengthening India's bond market and attracting foreign investment. Eligible investors should closely review the prescribed conditions and reporting requirements once detailed notifications and rules are issued.

For expert guidance on this topic, contact your tax professional today.