Since Parliament is not in session, the government promulgated an ordinance through an executive order to amend the Income Tax Act to provide tax exemptions on interest income and capital gains arising from sale, exchange or transfer of government securities effective from April 1 this year
New Delhi: The government on Friday said that it exempted foreign institutional investors and banks from the capital-gain tax on receipts arising from interest or sale of government securities (G-Secs). The move of the government is aimed at attracting more stable foreign capital at a time when the rupee is seen gradually plunging this year amid elevated oil prices and equity outflows due to the geopolitical situations including the West Asia crisis. This will be effective from April 1, 2026.
Since Parliament is not in session, the government promulgated an ordinance through an executive order to amend the Income Tax Act to provide tax exemptions on interest income and capital gains arising from sale, exchange or transfer of government securities effective from April 1 this year.
According to the finance ministry’s statement, the exemption would be applicable with effect from April 1. “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 FPIs in G-Secs, by exempting such investments from income tax on any interest or capital gain. This step will align the taxation on G-Secs with many comparable jurisdictions,” the ministry said.
Now, foreign investors are subject to a long-term capital gains tax of 12.5 per cent on listed shares and bonds held longer than 12 months. They pay a withholding tax of 20 percent on interest earned in the government bonds. The ordinance signed by President Droupadi Murmu defines the BIS as the international financial institution established in 1930 and headquartered in Basel, Switzerland. It also references existing statutory definitions of FIIs and government securities under Indian law.
In line with the government’s commitment to strengthen India's position as a leading global investment destination and to deepen the capital markets, the ministry of finance has another set of measures aimed at enhancing the ease of investment for individual persons resident outside India (PROIs) and FPIs, and to attract stable long-term foreign capital flows.
“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,” the ministry said.
With the view to enhance participation by FPIs in G-sec, the ministry also said that the government decided to expand the list of specified securities under the fully accessible route or FAR to also include new issuances in government securities in tenors of 15-year, 30-year and 40-year as also sovereign green bonds (SGBs) in the tenors of FAR-eligible securities.
Further, with respect to the FPI investments under the 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 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 percent of the state SGSs. “The sub-categories of investment limits, namely, general and long-term will also be merged into a single limit for investment in Government securities and SGSs, respectively,” it said.
Separately, the Reserve Bank of India (RBI) on Friday also announced a series of measures aimed at attracting foreign capital and strengthening external financing buffers as global uncertainty and elevated energy prices weigh on emerging markets. The RBI also ratified the finance ministry’s announcement by expanding the universe of government securities eligible under the FAR by including all new issuances of 15-year, 30-year and 40-year sovereign bonds.
