FII tax exemption on G-Secs: The government announced a fresh tax break for foreign institutional investors, or FIIs, who put money into Indian government securities on June 5, 2026. The new rule removes tax on both interest income and capital gains from these securities. It also covers foreign portfolio investors notified as FIIs, and it gives the same benefit to the Bank for International Settlements, or BIS. The change is part of the Income-tax (Amendment) Ordinance, 2026, and it is treated as effective from April 1, 2026.
The main idea is simple. The government wants Indian sovereign debt to look cleaner and more tempting for global money. By removing tax friction, the post-tax return becomes better for overseas investors. The move was aimed at drawing more stable foreign capital while the rupee has been under pressure from equity outflows and weaker currency conditions. Foreign investors had pulled out around ₹2.6 lakh crore from equities so far in 2026, after ₹1.66 lakh crore was withdrawn in the full year 2025.
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What Changed in the Tax Rule?
The ordinance adds a new exempt-income category for government securities in the Income-tax Act, 2025. Under the new setup, tax will not be charged on interest earned from government securities, and tax will also not be charged on capital gains made when those securities are sold, exchanged, or transferred. The exemption is not automatic for everyone, though. The ordinance says the benefit is subject to furnishing information in the form and manner that will be prescribed.
Before this change, foreign investors could face tax on these earnings under the FII framework. Mint reported that FIIs had to pay 12.5% long-term capital gains tax when a government bond was held for more than 12 months. If the bond was held for less than 12 months, 20% short-term capital gains tax applied. The interest income also faced withholding tax. Reuters likewise said the earlier system included 12.5% long-term capital gains tax and a 20% withholding tax on interest from government bonds.
Why the Market Cares?
Experts say the change could improve returns for foreign investors and help Indian government bonds look better compared with bond markets in other countries. One Deloitte India partner told Mint “This will increase the returns for FPIs (foreign portfolio investors) from investment in Indian G-Secs by 15-20% and improve the delta between returns on investment in Indian sovereign bonds compared to other countries thereby making India a bit more attractive.” The same report said this could also make India’s place in global bond indices more meaningful and reduce tax-compliance work for investors who only buy government securities.
How FIIs put Money into Government Securities
Government securities can be listed on Indian exchanges like NSE and BSE, or they can stay unlisted. Most active central government securities are listed. FIIs and FPIs mainly invest through two routes. Mint said these are the General Route and the Fully Accessible Route, or FAR.
It also reported that foreign investors have put over ₹17,000 crore into the debt market through FAR, while withdrawals under the general debt limit and the Voluntary Retention Route were about ₹4,000 crore and ₹340 crore so far this year.
