India Removes Tax Burden on Government Bond Investments for Foreign Investors

In a significant policy move aimed at attracting global investment, the Government of India has announced a complete tax exemption on income and gains earned by foreign investors from investments in Indian Government Securities (G-Secs). The decision is expected to enhance the attractiveness of India's sovereign debt market and encourage greater participation from international investors.

The Ministry of Finance has introduced the Income Tax Amendment Ordinance, 2026, under which Foreign Institutional Investors (FIIs) and eligible Foreign Portfolio Investors (FPIs) will no longer be required to pay tax on interest income or capital gains arising from investments in government bonds. The new provisions will apply retrospectively from April 1, 2026.

Long-Term Capital Gains Tax Reduced to Zero

One of the most notable changes under the revised tax framework is the complete removal of Long-Term Capital Gains (LTCG) tax on government securities. Previously, foreign investors were subject to a 12.5% LTCG tax on gains earned from these instruments. With the new ordinance, this tax rate has been brought down to nil, making capital gains from Indian sovereign bonds entirely tax-free.

Interest Income Also Exempt from Tax

The government has also abolished the 20% withholding tax that was earlier applicable to interest earned by foreign investors on Government Securities. As a result, both interest income and capital gains generated from these investments will now be exempt from taxation, substantially improving post-tax returns for overseas investors.

Strengthening India's Position as a Global Investment Destination

According to the Ministry of Finance, the tax reforms are part of a broader strategy to strengthen India's standing as a preferred destination for international capital. The government emphasized that these measures are intended to simplify investment procedures, improve market accessibility, and encourage long-term foreign participation in India's financial markets.

The initiative is expected to benefit both Persons Resident Outside India (PROIs) and Foreign Portfolio Investors (FPIs) by creating a more investor-friendly environment that aligns with global market standards.

Tax Benefits Extended to the Bank for International Settlements

The ordinance also grants similar tax exemptions to the Bank for International Settlements (BIS), the Switzerland-based institution that serves central banks across the world. This inclusion highlights India's efforts to integrate more closely with international financial institutions and global investment networks.

Potential Impact on India's Debt Market

Market experts believe that the removal of taxes on government bond investments could significantly improve the appeal of Indian sovereign debt among global investors. As India becomes increasingly integrated with international financial markets and global bond indices, the tax-free status of government securities may help attract substantial long-term foreign capital.

The reforms are also expected to support liquidity in the bond market, broaden the investor base, and enhance the competitiveness of Indian debt instruments compared to other emerging-market fixed-income opportunities.

Expert View

Commenting on the development, Nehal Sampat, Partner at Price Waterhouse & Co LLP, stated that the ordinance exempts both capital gains and interest income earned by FPIs from taxation with effect from April 1, 2026. However, the exemption is subject to compliance with prescribed information-reporting requirements.

He further noted that investment funds and Offshore Banking Units operating through the International Financial Services Centre (IFSC) and registered as FPIs may also qualify for the benefits. According to him, removing this tax-related hurdle could support greater inclusion of Indian Government Securities in global bond indices and potentially drive increased foreign investment into India over time.

A Positive Signal for Global Investors

The latest tax reforms represent a major step toward making India's sovereign debt market more globally competitive. By eliminating taxes on both interest income and capital gains from Government Securities, the government aims to create a seamless investment ecosystem that encourages international investors to increase their exposure to one of the world's fastest-growing major economies.

Short Summary

The Government of India has introduced the Income Tax Amendment Ordinance, 2026, making returns from Government Securities completely tax-free for eligible foreign investors. Effective from April 1, 2026, the move eliminates both capital gains tax and withholding tax on interest income, strengthening India's appeal as a global investment destination.