The Central Government on June 5 promulgated the Income Tax Amendment Ordinance 2026, providing significant tax relief to foreign investors investing in Indian government securities (G-Secs). Under the ordinance, eligible foreign institutional investors and certain specified entities, including the Bank for International Settlements, will be exempt from paying tax on both interest income and capital gains arising from investments in government bonds.

The ordinance amends Schedule IV of the Income Tax Act, 2025, and introduces new categories of exempt income linked to government securities. The exemption will apply to interest earned on government bonds as well as gains arising from their sale, transfer, or exchange, subject to prescribed reporting and compliance requirements. The changes will be effective from April 1, 2026.

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 and a 20% withholding tax on interest income from government securities. The removal of these taxes is expected to improve post-tax returns for overseas investors and enhance the attractiveness of Indian debt markets relative to competing emerging-market destinations.

The government stated that the measure is intended to facilitate investment in government securities and streamline the tax framework for eligible foreign investors. The move comes at a time when policymakers are seeking to boost foreign capital inflows and counter pressure on the rupee, which has weakened amid elevated crude oil prices and persistent foreign fund outflows.

Market participants believe the tax exemption could encourage greater participation by foreign portfolio investors in India's government bond market, broaden the investor base, and strengthen external financing conditions. The policy also aligns with broader efforts to increase foreign participation in Indian debt markets following the inclusion of Indian government bonds in major global bond indices.