Recognising the importance of a competitive tax regime in attracting global capital, the Government has decided to rationalise the tax treatment applicable to investments by Foreign Portfolio Investors in Government Securities, by exempting such investments from income tax on any interest or capital gain.
The Ministry of Finance has issued an ordinance to this effect. The ministry says this step will align the taxation on G-Secs with many comparable jurisdictions. The exemption shall be applicable from April 1 2026 and will apply to any interest or capital gains arising to FPIs on or after 01.04.2026 in respect of investments in G-Secs.
Similar income-tax exemption is also provided for Bank for International Settlements (BIS) for any interest or capital gains from its investments in G-Secs. “This will ensure stable systematic inflow of durable, patient foreign capital and long-term investors such as pension funds, insurance companies, and Sovereign wealth funds (SWFs).
Taken together, these reforms aim to reduce operational complexities, simplify market access, and provide a more seamless investment experience comparable with leading international financial markets,” government said.
These measures, officials said, are expected to expand the investor base for Indian equities and Government Securities and encourage wider participation from global investors seeking exposure to one of the world’s fastest-growing major economies.
Government says the step builds on the recent initiatives to enhance ease of doing business in capital markets.
“The Government has undertaken further reforms to make foreign investment in equities and G-Secs more accessible, efficient, and globally competitive," sources said.
WHAT HAS CHANGED
With the view to enhance participation by FPIs in G-Sec, the Government has decided to expand the list of specified securities under the Fully Accessible Route (FAR) to also include new issuances in Government securities in tenors of 15, 30 and 40 years as also Sovereign Green Bonds (SGrBs) in the tenors of FAR-eligible securities. Further, with respect to FPI investments under General Route, it has been decided to remove the three restrictions, viz. short-term investment limit, concentration limit and the security-wise limit for investments by Foreign Portfolio Investors (FPIs) in Government securities, 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). The sub-categories of investment limits, viz., ‘general’ and ‘long-term’ will also be merged into a single limit for investment in Government securities and SGSs, respectively.
HOW WILL THIS HELP
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. This is also expected to boost foreign exchange inflows for the country.
