India Issues Ordinance Exempting Foreign Investors from Taxes on Government Securities Investments

Central Government Issues Ordinance to Exempt Foreign Investors from Taxes on Government Securities

The Central government has issued the Income-tax (Amendment) Ordinance 2026, exempting foreign investors from paying taxes on interest income earned from government securities as well as on capital gains. The ordinance, which was promulgated by President Droupadi Murmu, amends Schedule IV of the Income-tax Act, 2025, to add new categories of exempt income linked to investments in government bonds.

The ordinance is effective April 1, 2026, making the benefit applicable retrospectively from the beginning of the current tax year. The exemption is aimed at facilitating investment in Government securities and streamlining the tax framework for eligible foreign investors. The finance ministry said that the exemption is part of a bid to boost foreign capital inflows and stem outflows to support the rupee and help contain the widening of current account deficit.

The ordinance specifies that the exemption would apply to both interest income and capital gains arising from sale, exchange or transfer of Government securities. It also defines “Government security” by linking it to the definition under the Government Securities Act, 2006. The exemption is subject to prescribed disclosure requirements and information furnished in a prescribed form and manner.

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Key Changes to Taxation

Prior to the ordinance, Foreign Institutional Investors (FIIs) had to pay 12.5 percent long-term capital gains tax (LTCG) on government bonds that were held for more than 12 months. The short-term capital gains tax rate was 20 percent, if the bond is held for less than 12 months. Both these taxes have been scrapped.

The withholding tax on interest income earned by foreign investors on government securities has also been eliminated. The previous tax rate was 20 percent, which was introduced in 2023 to keep it similar to the rates applicable on capital gains.

Impact on Foreign Investors

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Foreign investors, including the Bank for International Settlements (BIS), will be exempt from paying taxes on interest income and capital gains arising from government securities. The exemption is expected to boost foreign capital inflows and support the rupee.

Exchange Rate Developments

The rupee has depreciated around 5 percent against the dollar since the start of the Iran war on February 28. On June 3, the rupee was trading at 95.45 against the dollar after ending the previous session at 95.27.