Key facts
- Foreign investors and BIS exempted from capital gains tax on GSecs.
- Interest income tax also exempted for specified foreign investors.
- Exemption applies retrospectively from April 1, 2026.
- RBI launched other measures to improve foreign participation in markets.
- Previous tax burden made Indian sovereign debt less attractive.
The Indian government has issued an ordinance exempting foreign institutional investors (FIIs) and the Bank for International Settlements (BIS) from capital gains tax and interest income tax on investments in government securities (GSecs). This measure, effective retrospectively from April 1, 2026, aims to attract foreign capital and support the rupee amid external pressures. Previously, foreign investors faced a 12.5% long-term capital gains tax on listed bonds held over 12 months and a 20% withholding tax on interest income, making Indian sovereign debt less competitive. The exemption is part of a broader package by the government and the RBI to enhance foreign participation in domestic financial markets, including expanding eligible GSecs, easing investment restrictions, and introducing forex swap facilities. These reforms are intended to diversify the investor base, support government borrowing, and provide a buffer for the balance of payments, especially as India integrates into global bond markets. State Bank of India Managing Director Rama Mohan Rao Amara welcomed the move, stating it will encourage foreign portfolio investors to reconsider Indian debt.