- India has eliminated taxes for FPIs on interest and capital gains from specific government securities.
- The new ordinance removes the 20% withholding and capital gains taxes of up to 30%.
- The change aims to attract foreign capital and improve India’s position in global bond indices.
(INDIA) – India has exempted foreign portfolio investors from tax on interest and capital gains from certain government securities under the Income-tax (Amendment) Ordinance, 2026, issued on June 5, 2026. The change applies to FPIs holding Indian government securities, and it is expected to reduce tax costs on debt investments starting in tax year 2026, with returns and compliance steps falling into 2027.
The relief covers income from Indian government securities, also called G-Secs, and is aimed at foreign investors in the debt market. Officials have paired the measure with broader market-access changes in the Fully Accessible Route, or FAR, segment. The government estimates the revenue cost at about ₹10,000 crore a year.
The exemption is broad. Interest income from eligible G-Secs is now exempt from Indian income tax for FPIs. Capital gains on transfer of those securities are also exempt, whether the gains would previously have been treated as short-term or long-term.
The ordinance matters because the old regime imposed a material tax drag on foreign debt investors. Interest income generally faced 20% withholding. Capital gains were taxed at 30% for holdings of 24 months or less and 12.5% for holdings of more than 24 months.
The immediate beneficiaries are overseas funds, pension investors, sovereign investors, insurers, and other FPIs that buy Indian sovereign debt. Custodians, withholding agents, and fund administrators are also affected because tax deduction and reporting procedures will need revision once the government issues implementation rules.
The measure arrives with an unresolved date question. Market reports have referred to a retrospective start from April 1, 2025. The ordinance text itself points to April 1, 2026. Until the government issues a clarifying notification or rules, FPIs and intermediaries should treat the ordinance text as the operative legal reference.
| Item | Before the ordinance | After the ordinance |
|---|---|---|
| Interest on eligible G-Secs | 20% withholding tax | 0% Indian tax |
| Short-term capital gains, holding period 24 months or less | 30% | 0% |
| Long-term capital gains, holding period above 24 months | 12.5% | 0% |
| Who benefits | FPIs paid Indian tax on debt returns | FPIs receive full exemption on eligible G-Sec income and gains |
📅 Deadline Alert: The ordinance took effect on June 5, 2026. FPIs with trades, coupon receipts, or settlements in tax year 2026 should review withholding and return positions before filing in 2027.
The scope reaches both recurring income and exit gains. A foreign fund that earns ₹50 crore in coupon interest from eligible G-Secs would have faced ₹10 crore of withholding under the prior 20% rate. Under the new rule, that Indian tax cost falls to zero. A fund that sells a bond after 18 months with a gain of ₹100 crore would also move from a ₹30 crore tax bill to no Indian capital gains tax.
The FAR market is central to the policy. After the announcement, FPIs invested ₹8,794.743 crore in FAR government securities. FAR now covers 15-year, 30-year, and 40-year G-Secs, along with sovereign green bonds. India has also removed short-term investment limits, concentration limits, and security-wise caps in that route.
Some caps still remain. FPI investment ceilings continue at 6% for central government securities and 2% for state government securities. The tax exemption widens access and improves post-tax returns, but it does not remove those aggregate market caps.
The policy objective is straightforward. Lower tax friction can make Indian sovereign debt more competitive against other emerging-market bonds. It can also support India’s push for deeper participation in global bond indices, where after-tax return comparisons matter as much as nominal yield.
Reserve Bank of India officials linked the package to foreign capital for government borrowing. Finance Ministry officials have described it as a major liberalization step. The expected transmission runs through stronger debt inflows, lower bond yields, a firmer rupee, and less pressure for central bank intervention in foreign-exchange markets.
The fiscal trade-off is substantial. The annual revenue loss is estimated at ₹10,000 crore. Supporters argue that lower borrowing costs, steadier inflows, fewer tax disputes, and a broader investor base can offset part of that loss over time. No official long-range revenue recovery estimate has been published with the ordinance.
⚠️ Warning: Procedural rules for claiming the exemption have not yet been prescribed. Funds should not assume back-office treatment is settled until custodians and withholding agents receive formal instructions.
Transition treatment is the main compliance issue. If the final rules confirm April 1, 2026, coupon income and disposals from that date should qualify. If the government later confirms April 1, 2025, some investors may need refund claims, revised withholding reconciliations, or return adjustments for the earlier period. Existing holdings appear to qualify if the income event or transfer falls within the final effective window, but the government still needs to state that expressly.
U.S. taxpayers with exposure to these investments should separate Indian tax relief from U.S. tax reporting. A green card holder, H-1B worker, or other U.S. tax resident may still owe U.S. tax on fund income or gains. IRS Publication 519 covers U.S. tax residency, and foreign account reporting can trigger FinCEN Form 114, also called FBAR, and Form 8938. Treaty positions, entity classification, and PFIC rules can also affect the U.S. result.
FPIs and their advisers should now do four things. Identify which G-Secs fall within the exempt class. Recheck all 2026 coupon and sale transactions against the ordinance date. Ask custodians how they will handle withholding from June 2026 onward. Prepare for possible amended filings or refund work if the government confirms retrospective effect from April 1, 2025.
Funds launching new debt allocations have a short window to update documentation before 2027 filing season. Tax teams should retain trade records, holding-period calculations, custodian statements, and withholding certificates. Any investor with cross-border ownership, hybrid entities, or parallel U.S. filing duties should get country-specific advice before locking in a filing position.
⚠️ Disclaimer: This article is for informational purposes only and does not constitute tax, legal, or financial advice. Tax situations vary based on individual circumstances. Consult a qualified tax professional or CPA for guidance specific to your situation.
