India Offers Tax Relief to Foreign Portfolio Investors in Bid to Boost Foreign Investments

India Exempts Foreign Portfolio Investors from Tax on Government Securities

The Indian government has issued the Income-tax (Amendment) Ordinance, 2026, exempting foreign portfolio investors (FPIs) from paying tax on interest income and capital gains arising from investments in government securities. This move is aimed at boosting foreign participation in India's sovereign debt market and attracting stable overseas capital.

The ordinance, effective retrospectively from April 1, 2026, will exempt FPIs from paying tax on interest earned from government bonds and capital gains on both short-term and long-term holdings. The government has released a detailed set of FAQs explaining the rationale, scope, and expected impact of the new tax regime.

Key Changes in the New Tax Regime

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The new tax regime is a significant change from the previous taxation framework, which taxed FPIs on interest earned from government bonds and capital gains on both short-term and long-term holdings. The government has clarified that the exemption will apply to all FPIs, including those registered with the Securities and Exchange Board of India under the SEBI FPI Regulations.

FII Investments in Government Securities

As on May 12, 2026, FPIs held Rs. 54,091 crore in government securities through the general route, accounting for 0.83% of the total outstanding stock. Through the Fully Accessible Route (FAR), FPIs held Rs. 32,108 crore, accounting for 6.74% of the total outstanding stock. The combined holding in both routes stood at Rs. 37,5171 crore, accounting for 3.34% of the total outstanding stock.

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The exemption is expected to boost foreign participation in India's sovereign debt market and attract stable overseas capital. The government has released a detailed set of FAQs explaining the rationale, scope, and expected impact of the new tax regime, which will provide clarity to FPIs and other stakeholders.