Capital Gains Tax Exemption for Foreign Investors Under Income-tax Ordinance 2026

In a significant policy move aimed at strengthening foreign participation in India’s debt market, the Central Government has introduced a tax relief measure for Foreign Institutional Investors (FIIs) investing in government securities. The decision is expected to enhance the attractiveness of Indian government bonds among global investors and support the country's efforts to attract long-term overseas capital.

According to reports, the government has promulgated the Income-tax (Amendment) Ordinance, 2026, following approval by the Union Cabinet chaired by Prime Minister Narendra Modi. The amendment provides substantial tax benefits to foreign investors by exempting both interest income and capital gains earned from investments in specified government securities.

The ordinance has been officially notified through the Gazette of India and carries retrospective effect from April 1, 2026. The amendments have been made to the provisions of the Income-tax Act, 2025, ensuring that eligible foreign institutional investors receive tax relief on returns generated from government bond investments.

Under the revised framework, any interest income earned from government securities and capital gains arising from the sale, transfer, or exchange of such securities will not be subject to income tax in the hands of FIIs. This measure is expected to improve investment sentiment among international investors and increase participation in India’s sovereign debt market.

The government’s decision comes at a time when global economic uncertainties and geopolitical tensions, including the ongoing situation involving Iran, continue to influence international capital flows. By reducing the tax burden on foreign investors, policymakers aim to strengthen the resilience of India's financial markets and maintain a steady inflow of overseas funds.

Market experts believe that the exemption could further deepen the government securities market, improve liquidity, and position India as a more competitive destination for global fixed-income investments. The reform is also expected to align India's debt market with international practices that encourage foreign participation through tax-efficient investment structures.

Overall, the ordinance reflects the government's broader strategy of enhancing investor confidence, attracting foreign capital, and supporting the continued development of India's financial ecosystem.

Short Summary

The Government of India has issued the Income-tax (Amendment) Ordinance, 2026, granting Foreign Institutional Investors (FIIs) a tax exemption on both interest income and capital gains earned from investments in government securities. Effective retrospectively from April 1, 2026, the move aims to attract foreign capital and strengthen India's debt market.