In the last few months, the Indian Rupee has been hitting new lows regularly. Yields on the Government securities (G-secs) have been climbing. Foreign Institutional Investors (FIIs) have been withdrawing money out of India and taking US Dollars back to their home countries. The Government has been taking various steps to stop the FIIs from selling Indian securities and instead encourage them to invest fresh funds in India. On 5th June 2026, the Government announced tax relief for FII investments in G-secs. In this article, we will understand the details of this move.
Tax exemption
The Government announced the Income Tax (Amendment) Ordinance, 2026, to amend the Income Tax Act, 2025. As per the amendment, the Government has made the following changes.
- Tax exemption on the interest income
Interest income earned by FIIs from Government securities (G-secs) is exempt. Earlier, this interest income was subject to a 20% withholding tax.
2. Tax exemption on the capital gains
The short-term and long-term capital gains earned by FIIs on G-secs are exempt. Earlier, the short-term capital gains (STCG) were taxed at 30%. The long-term capital gains (LTCG) were taxed at 12.5%.
A listed G-sec is categorised as a long-term capital asset if it is held for more than 12 months, and an unlisted G-sec is categorised as a long-term capital asset if it is held for more than 24 months. Similarly, a G-sec is categorised as a short-term capital asset if held for 12 months or less, and an unlisted G-sec is categorised as a short-term capital asset if it is held for 24 months or less.
The Ordinance changes can be summarised as follows.
Income type |
Taxation as per Ordinance |
Taxation before Ordinance |
|
Interest income from G-secs |
Nil |
20% |
|
Short-term capital gains tax |
Nil |
30% |
|
Long-term capital gains tax |
Nil |
12.5% |
Along with the FIIs, the above exemptions apply to the Bank for International Settlements (BIS). The BIS is an international financial institution owned by central banks. It acts as a banker and asset manager for central banks and international organisations.
The Ordinance is deemed to have come into force from 1st April 2026.
Impact of Government measures
The Government’s decision to exempt FIIs and BIS from taxation on income from G-secs, along with its other reforms, is to strengthen India’s standing as a leading destination for global investment. The Government expects these measures to attract long-term foreign capital and deepen the G-sec market by broadening and diversifying the investor base.
With these measures, the Government expects to attract long-term institutional investors, such as pension funds, insurance companies, sovereign wealth funds, etc., to invest in India’s G-secs. These investors are expected to bring stable, sustained foreign capital flows into India, which can reduce the Government’s borrowing costs. Foreign capital inflows will boost the RBI’s forex reserves and also help stabilise the Indian Rupee against the US Dollar and other global currencies.
Other reform measures for FII investments in G-secs
The Central Government and the RBI acted in coordination on 5th June 2026 to announce steps to attract foreign capital into Indian G-secs. While the Government announced the Ordinance, the RBI Governor, in his Monetary Policy Statement, announced that for G-secs under the Fully Accessible Route (FAR), the universe of ‘specified securities’ will be expanded.
All new issuances of G-secs of 15, 30, and 40-year tenures will be included in the FAR. The FPIs invest in Indian G-secs through the FAR and General Route. The move will broaden investment opportunities for foreign investors across a wide range of G-secs. The availability of higher-maturity options will encourage greater participation in long-duration G-secs.
Inclusion of Indian G-secs in global indices
The Central Government and RBI reform measures are expected to support greater inclusion of Indian G-secs in global indices. In January 2026, Bloomberg deferred the decision on inclusion of Indian G-secs in the Bloomberg Global Aggregate Index. It said it would consider the matter in the middle of 2026. The decision is expected in the near future.
The Central Government’s tax exemption Ordinance and the RBI’s broadening of G-sec investment options for foreign investors are expected to boost the chances of inclusion of Indian G-secs in the Bloomberg index this time.
Debt market reforms: A win-win for all
The debt market reforms announced by the Government will bring in long-term foreign capital in Indian G-secs. It will help lower G-sec yields, increase forex reserves, and support the Indian Rupee. It will increase the probability of inclusion of Indian G-secs in global indices.
For foreign investors, it will provide them an opportunity to invest in Indian G-secs and earn higher returns than G-secs of developed countries like the US, Japan, EU, etc. It will provide an attractive investment avenue for long-term foreign institutional investors, such as pension funds, insurance companies, sovereign wealth funds, etc. Thus, it is a win-win for both stakeholders: Foreign investors and the Indian Government.
