Income-tax (Amendment) Ordinance, 2026: Major Tax Relief for Foreign Investors in Indian Government Securities

Income-tax (Amendment) Ordinance, 2026: Major Tax Relief for Foreign Investors in Indian Government Securities

Introduction

In a significant move aimed at enhancing India's attractiveness as a global investment destination, the Government of India has promulgated the Income-tax (Amendment) Ordinance, 2026, granting substantial tax relief to foreign investors investing in Indian Government Securities (G-Secs). The Ordinance amends Schedule IV of the Income-tax Act, 2025 and provides tax exemption on specified income earned from Government Securities by eligible Foreign Institutional Investors (FIIs) and the Bank for International Settlements (BIS). The amendment has been made effective retrospectively from 1 April 2026.

The measure is expected to improve post-tax returns for foreign investors, strengthen India's sovereign debt market, deepen liquidity, and support long-term capital inflows into the country.

Background: Why Government Securities Matter

Government Securities (G-Secs) are debt instruments issued by the Central Government and State Governments to finance public expenditure, infrastructure development, fiscal deficits, and welfare programs. These securities carry sovereign backing and are therefore considered among the safest investment instruments available.

Major Categories of Government Securities

Because of their low credit risk, Government Securities serve as a benchmark for pricing debt instruments across the financial system.

Who are Foreign Institutional Investors (FIIs)?

Foreign Institutional Investors (FIIs) are overseas entities that invest in Indian financial markets on behalf of their investors, beneficiaries, or stakeholders. Such institutions typically bring long-term capital and contribute significantly to market liquidity and stability.

Examples include:

• Pension Funds
• Sovereign Wealth Funds
• Insurance Companies
• Asset Management Companies
• Mutual Funds
• Endowment Funds
• Investment Funds
• Global Financial Institutions

These investors play a critical role in strengthening capital markets and facilitating global capital flows.

Key Amendment Introduced by the Ordinance

The Income-tax (Amendment) Ordinance, 2026 inserts new exempt income categories in Schedule IV of the Income-tax Act, 2025 for eligible FIIs and BIS investing in Government Securities.

1. Exemption of Interest Income

Interest income earned from investments in Government Securities by eligible FIIs and BIS shall be exempt from income tax, subject to prescribed conditions and furnishing of prescribed information.

Practical Significance

• Improves net investment returns.
• Enhances attractiveness of Indian sovereign debt.
• Encourages greater participation by global fixed-income investors.
• Aligns India with international practices adopted by several developed debt markets.

2. Exemption of Capital Gains

Capital gains arising from:

• Sale of Government Securities;
• Exchange of Government Securities;
• Transfer of Government Securities; or
• Redemption/Maturity of Government Securities

shall also qualify for exemption, subject to prescribed conditions.

Practical Significance

• Eliminates tax friction on trading and portfolio rebalancing.
• Improves secondary market activity.
• Supports greater liquidity and efficient price discovery.

Effective Date

The Ordinance provides that these exemptions shall be deemed to have come into force from 1 April 2026. Consequently, eligible income earned on or after this date may qualify for exemption subject to compliance with prescribed requirements.

Tax Position: Before and After the Ordinance

Reports indicate that foreign investors were previously subject to a withholding tax on interest income and capital gains taxation depending on the nature and holding period of investments.

Parity with the Bank for International Settlements (BIS)

The Ordinance also grants similar tax treatment to the Bank for International Settlements.

BIS is widely recognized as the "Central Bank for Central Banks" and plays a vital role in promoting international monetary and financial stability through cooperation among central banks worldwide.

By extending equivalent tax treatment to FIIs and BIS, the Government has sought to create a more uniform and globally competitive tax framework for investments in Indian Government Securities.

Why Has the Government Introduced This Measure?

The policy appears to be part of India's broader strategy to:

• Attract stable long-term foreign capital.
• Deepen the domestic bond market.
• Expand the investor base for Government borrowing.
• Enhance India's integration with global debt markets.
• Improve competitiveness of Indian Government Securities relative to other sovereign debt markets.

The amendment comes at a time when India is actively pursuing measures to strengthen foreign participation in its debt markets.

 Expected Impact on India's Financial Markets

While the actual outcomes will depend on market conditions and investor response, the amendment may generate several positive effects.

Increased Foreign Participation

Tax-free interest income and capital gains can improve post-tax yields for foreign investors, potentially increasing allocations to Indian Government Securities.

Improved Market Liquidity

Higher participation by institutional investors may improve trading volumes and liquidity in the secondary market.

Broader Investor Base

The measure could diversify the investor base beyond domestic institutions, reducing concentration risks.

Support for Government Borrowing Programme

Higher demand for Government Securities may contribute to more efficient borrowing and potentially moderate borrowing costs over the medium term.

Strengthening India's Global Position

The reform supports India's long-term objective of becoming a more prominent destination for global fixed-income investments and sovereign debt allocations.

 Compliance Requirements

The exemption is not unconditional. Eligible investors must comply with prescribed requirements, including furnishing information in the manner specified by the Government and tax authorities. Failure to satisfy prescribed conditions may affect eligibility for exemption.

Investors should therefore closely monitor future notifications, rules, and procedural guidelines issued by the Central Government and the Income-tax Department. 

Conclusion

The Income-tax (Amendment) Ordinance, 2026 represents a significant policy initiative designed to strengthen India's sovereign debt market and attract stable foreign capital. By exempting interest income and capital gains earned from Government Securities by eligible FIIs and BIS, the Government has substantially enhanced the post-tax attractiveness of Indian sovereign debt instruments.

Although the ultimate impact will depend on investor response and global market conditions, the reform is widely expected to support deeper bond markets, improved liquidity, broader investor participation, and stronger integration of India's debt markets with the global financial system. The amendment also creates new advisory and compliance opportunities for tax professionals, Chartered Accountants, CMAs, CSs, and financial consultants.

 Disclaimer

This content is shared strictly for general information and knowledge purposes only. Readers should independently verify the information from reliable sources. It is not intended to provide legal, professional, or advisory guidance. The author and the organisation disclaim all liability arising from the use of this content. The material has been prepared with the assistance of AI tools.