The Central Government on June 5 issued the Income Tax Amendment Ordinance 2026, providing tax exemptions to foreign portfolio investors (FPIs) and certain international institutions on income earned from investments in Indian government securities. The ordinance removes capital gains tax as well as tax on interest income arising from eligible government bond investments, marking a significant policy shift to encourage foreign participation in India's debt market.

Prior to the amendment, foreign investors were subject to a 12.5% long-term capital gains tax on listed bonds held for more than 12 months. Interest income from government securities also attracted withholding tax, reducing the attractiveness of Indian sovereign debt compared with other global fixed-income markets.

The government has introduced the measure to boost foreign capital inflows at a time when the Indian rupee has faced pressure from elevated crude oil prices and sustained foreign portfolio outflows from domestic equity markets. Policymakers expect the tax relief to improve the competitiveness of Indian government bonds and encourage greater participation by global investors.

The move builds on earlier efforts to integrate India's debt market with global financial markets. Over the past few years, India has expanded foreign investor access through the Fully Accessible Route (FAR), enabling inclusion of Indian government bonds in major global bond indices such as the JPMorgan Emerging Market Bond Index and the Bloomberg Emerging Market Local Currency Bond Index.

Market participants believe the tax exemption could help improve foreign demand for government securities over the medium term, lower frictional costs for overseas investors, and support broader capital inflows into the economy. The measure is also expected to strengthen India's case for inclusion in additional global bond benchmarks.