India Removes Tax Burden on Foreign Investors in Government Bonds to Attract Global Capital

New Delhi: In a major policy move aimed at attracting long-term foreign investment, the Central Government has issued the Income-tax (Amendment) Ordinance, 2026, exempting foreign investors from paying tax on interest income and capital gains earned from investments in government securities.

The ordinance, which takes effect from April 1, 2026, amends Schedule IV of the Income-tax Act, 2025. Under the new provisions, Foreign Institutional Investors (FIIs) will no longer be required to pay tax on interest earned from government bonds or on capital gains arising from their sale, exchange, or transfer, subject to prescribed disclosure requirements.

The tax relief has also been extended to the Bank for International Settlements (BIS), provided it complies with specified reporting norms.

Key Benefits for Foreign Investors

The new exemption removes:

• 12.5% long-term capital gains tax on government securities held for more than 12 months.
• 20% short-term capital gains tax on securities held for less than a year.
• 20% withholding tax (TDS) that was previously levied on interest income earned from government bonds.

Relaxation of Investment Restrictions

To further encourage overseas participation in India's bond market, the government has also eased investment norms for Foreign Portfolio Investors (FPIs) investing in government securities under the General Route.

The following restrictions have been removed:

• Short-term investment limits
• Concentration limits
• Security-wise investment limits

However, the overall investment caps remain unchanged:

• 6% of outstanding Central Government securities
• 2% of outstanding State Government securities (SGSs)

Expected Impact

The government expects the measures to deepen India's bond market, improve the development of a smooth and efficient yield curve, and attract steady inflows of long-term foreign capital. The reforms are particularly aimed at drawing investments from institutions such as pension funds, insurance companies, and sovereign wealth funds.

Officials believe the policy will help strengthen the rupee, increase foreign capital inflows, and reduce pressure from a widening current account deficit by making Indian government bonds more attractive to global investors.

With inputs from IANS