The government has promulgated the Income-tax (Amendment) Ordinance, 2026, granting tax exemptions on interest income and capital gains earned from investments in government securities by Foreign Institutional Investors (FIIs) and the Bank for International Settlements (BIS).
The ordinance, issued by President Droupadi Murmu on Friday, amends Schedule IV of the Income-tax Act, 2025, and will be deemed to have come into force retrospectively from April 1, 2026.
Under the amendment, interest earned on government securities, as well as capital gains arising from their sale, exchange or transfer, will be exempt from income tax for FIIs and BIS, subject to furnishing prescribed information to tax authorities.
Currently, foreign Institutional Investors or Foreign Portfolio Investors (FPIs) face a 20% withholding tax on interest income earned from Indian debt securities (government bonds and rupee-denominated bonds). On long-term capital gains, a 12.5% tax is levied while on short-term capital gains, the tax rate is 30%.
The move introduces two new entries—13D and 13E—in Schedule IV of the Income-tax Act. While Entry 13D covers Foreign Institutional Investors, Entry 13E extends the same benefit to the BIS, the Switzerland-headquartered international financial institution often described as the central bank for central banks.
The ordinance also inserts a new explanatory note defining BIS and clarifying that the term “government security” will have the same meaning as under the Government Securities Act, 2006.
The government said the ordinance was necessary as Parliament is not currently in session and circumstances required immediate action.
The tax relief is expected to enhance the attractiveness of Indian government bonds for foreign investors at a time when India is seeking deeper integration with global debt markets and greater participation from overseas institutional investors.
Rajesh H Gandhi, partner, Deloitte India, says the tax cut will increase the returns for FPIs from investment in Indian G-Secs by 15-20% and improve the delta between returns on investment in Indian sovereign bonds compared to other countries thereby making India a bit more attractive. “This also makes India' s inclusion in the global bond indices more meaningful since tax was the key hindrance to the same. FPIs investing only in Government securities will also be free from any tax compliances such as return filing etc. The move should ease pressure on the rupee over the medium to longer term,” says Gandhi.
The latest action comes amid call for tax rationalisation for foreign portfolio investors across equity and debt investment.