New Delhi: The Central Government has issued the Income-tax (Amendment) Ordinance, 2026, exempting foreign investors from paying income tax on interest earned from government securities (G-Secs) as well as capital gains arising from their sale, transfer or exchange. The ordinance was promulgated by President Droupadi Murmu on June 5 and comes into effect retrospectively from April 1, 2026.
The move is aimed at making Indian government securities more attractive to overseas investors, improving post-tax returns and encouraging greater foreign participation in the country’s debt market.
Ordinance amends Income-tax Act
The Income-tax (Amendment) Ordinance, 2026, amends Schedule IV of the Income-tax Act, 2025, by introducing new categories of tax-exempt income linked to investments in government securities. Under the amendment, eligible foreign investors will not be required to pay tax on interest income earned from G-Secs or on capital gains generated through their sale, exchange or transfer, subject to prescribed conditions and disclosure requirements.
The exemption also extends to the Bank for International Settlements (BIS) for income arising from investments in government securities.
Benefit applicable from April 1
Although the ordinance was issued on June 5, the tax relief will be applicable from April 1, 2026, ensuring that eligible investors receive the benefit for the entire current financial year. Any interest income or capital gains arising on or after that date from investments in government securities will qualify for the exemption.
The retrospective implementation is expected to provide certainty to foreign investors who have already invested in Indian government bonds during the current tax year.
Move aimed at attracting foreign capital
The government said the exemption is intended to facilitate investment in government securities and streamline the tax framework for eligible foreign investors. Analysts believe the decision will improve the attractiveness of Indian debt instruments by increasing post-tax returns.
Previously, foreign investors were subject to a 12.5% long-term capital gains tax on qualifying bond investments and a 20% withholding tax on interest earned from government securities. The removal of these taxes is expected to broaden the investor base and support inflows into India’s bond market.
Support for debt market and rupee
Market experts have described the ordinance as a significant step towards attracting stable foreign capital at a time when the Indian rupee has been under pressure from global uncertainties, higher crude oil prices and capital outflows. The measure is expected to strengthen demand for government securities and enhance the competitiveness of India’s debt market.
While analysts do not expect an immediate impact on bond yields, they believe the exemption could improve long-term investor sentiment and encourage greater participation by overseas funds in government securities.
Part of broader financial reforms
The ordinance follows the Union Cabinet’s approval of measures aimed at easing tax rules for foreign investors and improving the investment climate for overseas capital. The government has indicated that the changes are part of a broader strategy to deepen financial markets and support economic stability.
The exemption is expected to benefit foreign portfolio investors holding government securities while reinforcing India’s efforts to attract long-term international capital into the debt market.