- India plans to legalize tax exemptions for foreign institutional investors in sovereign debt through a new bill.
- The measure specifically targets qualifying institutional investors and the Bank for International Settlements.
- Individual NRIs and retail investors remain excluded from relief under the proposed legislative framework.
India plans to introduce the Income-tax (Amendment) Bill, 2026 when Parliament’s Monsoon Session begins on July 20, seeking to preserve a targeted exemption for foreign institutions investing in Indian sovereign debt. The measure would replace a June ordinance covering interest and capital gains from qualifying Government securities.
The proposal does not create a general tax break for all foreign investors. Ordinary NRIs, OCIs and overseas retail investors are not automatically included.
President promulgated Ordinance No. 2 of 2026 on June 5. It amended Schedule IV of the Income-tax Act, 2025, with effect from April 1, 2026, and named two eligible categories: a qualifying foreign institutional investor and the Bank for International Settlements.
Free toolSubstantial Presence Test CalculatorThe exemption covers both income streams. It applies to interest earned on qualifying sovereign instruments and capital gains from their sale, exchange or transfer.
The temporary law remains conditional. Eligible institutions must furnish information in the form and manner prescribed by the government.
As of July 17, the bill remains part of the government’s proposed legislative agenda. It has not yet been introduced, passed by both Houses or given presidential assent. Its final wording could reproduce or change the ordinance.
The June ordinance created relief for two institutional categories
The ordinance links the foreign-institution exemption to the definition in section 210(6)(a) of the Income-tax Act, 2025. That provision refers to an investor specified through a Central Government notification.
A foreign fund, company or person investing from outside India therefore does not qualify solely because it is based overseas. Another regulatory registration may also fail to establish eligibility.
The Basel, Switzerland-based institution receives a separate reference in the measure. The other category depends on the government’s notified definition of a qualifying foreign institutional investor, or FII.
The legal treatment also turns on the asset itself. The ordinance adopts the meaning of “Government security” under section 2(f) of the Government Securities Act, 2006.
That definition narrows the potential relief. Private Indian company bonds, listed non-convertible debentures, bank fixed deposits, debt mutual funds, equity shares, real estate investments and securities issued by foreign governments should not automatically qualify merely because they are debt, fixed-income or investment products.
The instrument’s legal classification will control. Its marketing description will not.
Reporting rules could determine how the exemption works
The ordinance leaves several practical questions for future rules, forms and notifications. Authorities may specify which institutions qualify, what declarations or certificates they must submit and whether information goes to the Indian payer, custodian or tax authority.
They may also establish how withholding-tax relief operates and whether an investor must seek a refund after tax has already been deducted.
Institutional investors will need to confirm five points before treating income as exempt:
- Investor status: Establish that the entity falls within the FII category notified for section 210(6)(a). Status under another foreign-investor framework may not be enough.
- Asset classification: Confirm that the holding meets the statutory definition tied to section 2(f) of the Government Securities Act, 2006.
- Income date: Separate income arising before April 1, 2026, from income arising on or after that date, because the ordinance is deemed effective from April 1, 2026.
- Prescribed information: Complete the required reporting in the form and manner set by the government.
- Withholding treatment: Check whether the payer or custodian can apply relief at source. If tax has already been withheld, review whether a return, refund claim or supporting certificate is needed.
The ordinance does not make the relief automatic, even for an institution that meets the investor and asset tests.
Parliament must replace the temporary measure
The government issued the ordinance under Article 123 of the Constitution because Parliament was not in session on June 5. An ordinance has the same force as an Act while it operates, but it must be placed before Parliament.
It ordinarily ceases to operate six weeks after Parliament reassembles unless legislation replaces it or the parliamentary process otherwise approves it. The Monsoon Session is scheduled to begin July 20.
The proposed bill is intended to convert that temporary arrangement into regular parliamentary legislation. It must pass both Houses and receive presidential assent before becoming an Act.
The legislative text will show whether lawmakers retain the current scope. Investors will need to examine any changes to eligible categories, covered instruments, the April 1, 2026 effective date, disclosure duties, withholding procedures, transitional treatment and penalties for non-compliance.
Rules, forms and Central Government notifications may still be needed after enactment before the relief can operate in practice.
The policy targets sovereign-market participation
The government’s stated objective is to deepen India’s sovereign debt market, improve liquidity and attract stable international capital. Sovereign borrowing instruments issued by the Central or State Government affect yields, liquidity and participation by overseas investors.
Removing Indian tax from both periodic interest and disposal gains can increase the after-tax return for qualifying institutions. That could make Indian sovereign debt more competitive against bonds issued by other countries.
The measure arrives amid global economic volatility, geopolitical uncertainty, elevated crude-oil prices and supply-chain disruptions. Greater foreign participation in rupee-denominated sovereign debt may support liquidity and capital inflows, although investors still face currency, interest-rate and market risks.
Possible market effects include changes in bond prices and yields, government borrowing costs, foreign-capital flows, demand for the Indian rupee and interest-rate expectations across the financial system.
Those effects are not guaranteed. Exchange-rate movements, monetary policy, settlement arrangements, geopolitical risk and the ability to enter or exit positions will continue to influence investment decisions.
Personal investments by NRIs and OCIs remain outside the named categories
The ordinance does not list individual NRIs, individual OCIs, foreign citizens of Indian origin, overseas employees investing in India, returning Indians, non-resident family offices or foreign companies outside the notified institutional definition.
An NRI buying sovereign debt through an Indian bank account, broker, bond platform or permitted RBI route must instead assess the rules tied to the individual’s residential status, investment route, asset and applicable tax treaty.
Ownership by an overseas individual does not itself bring the holding within the institutional relief. The same restriction applies to an overseas retail investor acting personally.
Individuals could still feel indirect effects if institutional demand changes prices, yields, liquidity, borrowing costs or currency demand. Those market consequences would not amount to a personal exemption.
The next formal test comes with introduction of the bill after the session opens on July 20. Until Parliament settles the text and the government issues supporting requirements, institutions must match their status, holdings, income dates and reporting records to the ordinance’s conditions.
This article is for informational purposes only and does not constitute tax advice. Consult a qualified tax professional or CPA about your specific situation.
