The central government issued the Income‑tax (Amendment) Ordinance, 2026, exempting foreign investors from paying taxes on interest income and capital gains arising from investments in government securities.
The ordinance, effective April 1, 2026, amends Schedule IV of the Income‑tax Act, 2025, to add new entries exempting “any interest on Government security, and any capital gains arising from the sale, exchange or transfer of such Government security” earned by Foreign Institutional Investors (FIIs), subject to prescribed disclosure requirements.
The same exemption was also extended to the Bank for International Settlements (BIS), conditional on information filings in prescribed forms.
The move exempts FIIs from a long‑term capital gains tax (LTCG) of 12.5 per cent on government bonds held for over 12 months and a short‑term capital gains rate of 20 per cent for held less than a year.
It also eliminated withholding tax on interest income earned by foreign investors on government securities. Previously, they had to pay a withholding tax (tax deducted at source) of 20 percent on interest income from government bonds.
For FPI investments under General Route, the government will remove the three restrictions, viz. short-term investment limit, concentration limit and the security-wise limit for investments by Foreign Portfolio Investors (FPIs) in G-secs, while retaining the overall quantitative investment limit of 6 per cent of the outstanding stock of the Central Government securities and 2 per cent of the State Government securities (SGSs).
These measures will help in development of a smooth yield curve, and attract stable systematic inflow of long-term, patient foreign capital, including long-term investors such as pension funds, insurance companies, and sovereign wealth funds.
The government made these moves to boost foreign capital inflows and curb outflows to support the rupee and help contain the widening of the current account deficit.
