(INDIA) – India exempted Foreign Institutional Investors and the Bank for International Settlements from tax on interest and capital gains from Government securities through an ordinance published on June 5, 2026, a step aimed at reducing tax costs for eligible overseas institutional investors in the sovereign debt market.

The exemption covers two types of income: interest on a Government security and capital gains arising from the sale, exchange or transfer of that Government security. It applies only if the eligible investor furnishes information in the prescribed form and manner.

New Delhi framed the relief narrowly. It applies to Foreign Institutional Investors, or FIIs, and the Bank for International Settlements, not to all foreign investors and not to ordinary non-resident Indians holding Indian assets.

The legal change came through the Income-tax (Amendment) Ordinance, 2026, published in the Gazette of India Extraordinary on June 5, 2026. The ordinance amends the Income-tax Act, 2025 and is deemed to have come into force from April 1, 2026.

Under the amendment, India inserted serial numbers 13D and 13E in Schedule IV of the Income-tax Act, 2025. Serial number 13D applies to an FII, while 13E applies to the Bank for International Settlements.

The ordinance ties those categories to existing legal definitions. “Foreign Institutional Investor” carries the meaning assigned in section 210(6)(a) of the Income-tax Act, 2025, while “Government security” carries the meaning used in section 2(f) of the Government Securities Act, 2006.

That makes the scope precise rather than broad. The exemption covers only eligible persons and only income tied to Government securities, leaving equity shares, mutual funds, private bonds, corporate debt, real estate and ordinary retail products outside the relief.

Before this ordinance, FIIs generally faced Indian tax on income from securities and capital gains from transfers of securities under the special regime in Section 115AD of the Income-tax Act, 1961. That provision taxed income from securities and gains from transfer of those securities under a separate framework for overseas institutional investors.

Long-term capital gains under that structure were taxable at the applicable special rate, and after the 2024 rate changes, market reports described the long-term capital gains rate on listed shares and bonds as 12.5%. Short-term capital gains on covered securities were generally taxed at 30%, while short-term capital gains covered by Section 111A were taxed at 15% before July 23, 2024 and 20% on or after July 23, 2024.

FIIs also generally could not claim normal indexation or foreign currency adjustment benefits under Section 48 while computing capital gains under Section 115AD. That made the statutory tax rate especially relevant for investors deciding whether to hold Indian sovereign debt.

The change arrives as India tries to draw more overseas money into its debt market during a period of rupee pressure, higher crude oil prices, global uncertainty and foreign capital outflows. By removing tax on covered interest income and covered gains, the government is trying to raise post-tax returns for eligible bond investors.

Market reports cited in the policy context stated that net foreign portfolio investor outflows had reached about Rs. 2.47 lakh crore in 2026, more than double the Rs. 1.04 lakh crore withdrawn during calendar year 2025. Reports also stated that the rupee touched an all-time low of 96.965 against the U.S. dollar in May 2026.

Those figures help explain the timing. Overseas institutions that buy Indian sovereign debt bring foreign currency into India and convert it into rupees, which can support the currency and widen the investor base for government borrowing.

The tax break also sits alongside Reserve Bank of India steps to ease foreign access to the bond market. Reports stated that the RBI would remove certain operational restrictions for foreign portfolio investment in Government securities under the General Route, including the short-term investment limit, concentration limit and security-wise limit.

Together, the tax relief and the regulatory changes address two different barriers. One lowers the tax burden; the other reduces operational limits that can deter large overseas allocations.

Indian Government securities have also gained weight in global fixed-income portfolios after inclusion in major bond indices. That shift matters because large overseas funds often follow index composition, and lower tax friction can increase the appeal of adding India exposure.

The immediate fiscal effect is a loss of tax revenue on covered interest and gains for eligible investors. The government appears to be betting that stronger foreign participation, better liquidity and a deeper sovereign debt market will offset that cost over time through broader market stability and lower borrowing pressure.

Currency markets are unlikely to treat the move as a guarantee of a rupee rally. Crude prices, the strength of the U.S. dollar, foreign equity flows, India’s current account position, inflation expectations, interest-rate policy, global risk sentiment and geopolitical developments still shape where the rupee trades.

Still, the measure gives overseas bond investors a clearer post-tax return profile. That makes it rupee-supportive, even if it does not assure a sharp appreciation.

The ordinance does not create a general tax holiday for non-resident Indians. NRIs investing in shares, mutual funds, real estate, private bonds, retail debt instruments or other Indian assets remain outside this exemption unless they fall within the specified eligible category and hold a covered Government security.

Ordinary NRI reporting, tax deducted at source and tax compliance obligations also remain in place. India did not abolish capital gains tax for all foreign investors, and it did not make gains from Indian equity shares, mutual funds or real estate automatically tax-free.

That distinction matters because “foreign investors” can easily sound broader than the law allows. The Gazette language is confined to FIIs and the Bank for International Settlements, and even for them the relief applies only to specified income from Government securities.

The change gives Foreign Institutional Investors a targeted incentive to hold sovereign paper at a moment when India wants deeper foreign participation in its debt market. If those inflows strengthen, the effect would extend beyond tax savings, showing up in bond-market liquidity, a broader investor base and steadier demand for rupees.