Prime Highlights
- Foreign institutional investors are now exempt from capital gains tax and interest income tax on Indian government securities, raising their effective returns from Indian bonds.
- The exemption is expected to strengthen India’s appeal among global fixed-income investors and bring more stable foreign capital into the debt market over the medium term.
Key Facts
- The Bank for International Settlements is an international body owned by central banks worldwide and serves as a key institution for global monetary cooperation.
- Foreign investors were previously taxed at 12.5 percent on long-term capital gains from listed Indian government bonds held beyond one year, plus applicable taxes on interest income.
Background
Foreign institutional investors and the Bank for International Settlements will no longer be required to pay capital gains tax on specified Indian government securities under a new government measure. The move is expected to support foreign participation in the bond market.
The exemption came through the Income-tax Amendment Ordinance 2026, promulgated by President Droupadi Murmu with Parliament not in session. Under the ordinance, eligible foreign investors will receive tax relief on interest income and capital gains from notified government securities. The relief takes effect from the start of the current financial year.
Previously, foreign investors paid a 12.5 percent long-term capital gains tax on listed bonds held beyond one year, along with applicable taxes on interest income from government securities. Under the revised framework, overseas investors retain a significantly higher share of their returns from Indian bonds.
The ordinance arrives when the rupee has shed more than five percent of its value this year, pressured by elevated crude oil prices and persistent foreign outflows from domestic equities. Policymakers have been working to channel more stable foreign capital into the economy to ease currency pressure and guard against external shocks.
In recent years, the government eased investment restrictions on certain government securities under the Fully Accessible Route, helping India secure inclusion in major global bond indices.
The latest tax exemption builds on that progress and is expected to strengthen India’s standing among international fixed-income investors.
Analysts noted the relief could gradually widen the investor base for government securities. A sharp immediate jump in inflows is unlikely, but the measure is broadly seen as a meaningful step toward deepening foreign participation in India’s bond market over the medium term.
