Govt exempts foreign investors from tax on G-Secs: Why does this matter?
New Delhi, Jun 5, 2026
The move comes amid sustained pressure on the rupee and persistent foreign portfolio outflows, with the exemption set to apply to income earned on or after April 1, 2026
The Centre on Friday announced that foreign institutional investors (FIIs) and the Bank for International Settlements (BIS) will be exempt from capital gains tax and interest income tax on investments in government securities from April 1, 2026.
The decision comes as the government seeks to attract stable long-term foreign capital at a time when the rupee has emerged as one of the worst-performing emerging market currencies this year, depreciating about 7 per cent amid elevated crude oil prices, sustained foreign equity outflows, and geopolitical tensions in West Asia. Officials said the move is aimed at improving post-tax returns for overseas investors in Indian sovereign debt and broadening the investor base for government securities.
What are government securities?
Government securities, or G-Secs, are debt instruments issued by the central or state governments to finance their borrowing requirements. These include Treasury Bills, dated securities, and sovereign green bonds issued by the Centre.
G-Secs are considered among the safest rupee-denominated financial instruments in the market as they are backed by the government. Foreign investors can invest in them through routes such as the Fully Accessible Route (FAR) and the general investment route permitted by the Reserve Bank of India (RBI).
What has changed?
Under the existing tax framework, foreign institutional investors are taxed on both interest income earned from government securities and capital gains arising from their sale or redemption. Long-term capital gains on listed government securities are currently taxed at 12.5 per cent, while interest income attracts a 20 per cent tax.
Through the Income-tax (Amendment) Ordinance, 2026, the government has exempted FIIs and BIS from tax on both interest income and capital gains arising from investments in government securities.
The exemption will apply to income earned on or after April 1, 2026, and is expected to align India’s taxation regime for sovereign debt more closely with several global markets that offer favourable tax treatment to foreign investors.
Why has the government announced this now?
The move comes amid sustained pressure on the rupee and continued foreign portfolio outflows. Foreign investors this year have withdrawn almost ₹2.6 trillion from Indian equities, significantly higher than the outflows recorded in the whole of 2025.
With this exemption, the Centre is seeking to attract more stable, long-duration capital into India’s debt market to cushion external pressures and support foreign exchange inflows.
The government has also been attempting to deepen India’s sovereign bond market and expand the pool of overseas investors participating in government securities. Alongside the tax exemption, authorities have widened the scope of government securities available under FAR, including longer-tenure bonds and sovereign green bonds.
Who will benefit?
The new rules will primarily benefit foreign portfolio investors (FPIs) registered with the Securities and Exchange Board of India (Sebi), which are treated as foreign institutional investors under the Income-tax Act, 2025. These include global asset managers, pension funds, insurance companies, and sovereign wealth funds that invest in Indian debt markets.
The exemption has also been extended to BIS, an international financial institution owned by central banks that facilitates monetary and financial cooperation globally. According to the government’s FAQ document, BIS has not yet invested in Indian government securities.
How much foreign money is already invested?
According to official data, FPIs held about ₹3.75 trillion worth of government securities as of May 12, 2026, accounting for roughly 3.34 per cent of the total outstanding stock.
Of this, around ₹3.21 trillion was invested through the Fully Accessible Route (FAR), while approximately ₹54,000 crore was held through the general investment route.
Why does this matter for India?
The government expects the measure to help attract more stable and long-term foreign capital into India’s debt markets at a time of volatility in global financial markets and pressure on the rupee.
“These measures will help in the 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 said.
The move is also expected to boost foreign exchange inflows, deepen participation in the sovereign bond market, and support demand for government securities over the longer term.
[The Business Standard]
