Government exempts Capital Gains Tax on FII Investments in govt securities to boost foreign inflows
The government on Friday promulgated an ordinance exempting capital gains tax on investments made by Foreign Institutional Investors (FIIs) in government securities, in a move aimed at boosting foreign capital inflows and strengthening India’s debt markets. The decision comes amid ongoing global economic uncertainty linked to geopolitical tensions, including the continuing Iran conflict.
According to a PTI report, the Union Cabinet chaired by Prime Minister Narendra Modi had earlier approved the ordinance to amend the Income-tax Act, 2025, paving the way for tax relief on both interest income and capital gains earned by FIIs from government securities. The measure was formally notified through the Income-tax (Amendment) Ordinance, 2026.
The ordinance, published in the Gazette of India, has been given retrospective effect from April 1, 2026. It provides that interest income as well as capital gains arising from the sale, transfer, or exchange of government securities will be fully exempt from tax in the hands of eligible foreign institutional investors, subject to compliance requirements.
The exemption also extends to the Bank for International Settlements (BIS), ensuring similar tax treatment for its investments in Indian government securities. The notification clarifies that FIIs will be defined as per the Income-tax Act, 2025, and government securities will be as defined under the Government Securities Act, 2006.
Investors will be required to submit necessary information in the prescribed format to avail of the benefits under the new framework. The government has said the move is designed to enhance the attractiveness of India’s sovereign debt market and encourage greater participation from global investors.
Currently, foreign investors face a 12.5% long-term capital gains tax on listed equities and bonds held beyond one year, while interest income on government securities is subject to withholding tax. A previous concessional rate of 5% for foreign investors was withdrawn in 2023.
Market experts have long argued for easing tax burdens on foreign portfolio investment, especially as India continues to witness sustained capital outflows. Net FPI withdrawals have reached Rs 2.47 lakh crore so far this year, more than double the outflows recorded in the previous calendar year.
The rupee has also come under pressure amid global volatility, recently hitting a record low before recovering partially due to RBI intervention and easing crude oil prices following diplomatic developments in the West Asia region.
