India Exempts Foreign Investors From Taxes On Government Securities Returns
India removes taxes on foreign investors’ earnings from government securities.
The Government of India has announced a major tax overhaul aimed at foreign investors in government securities, making income and capital gains from Indian sovereign bonds effectively tax-free for eligible overseas participants. The move is intended to boost global participation in India’s debt market and strengthen the country’s position as an attractive destination for long-term foreign capital.
According to an Income Tax Amendment Ordinance issued in 2026, the Centre has exempted Foreign Institutional Investors (FIIs) and other non-resident investors from paying tax on interest income earned from government securities (G-Secs). The ordinance also removes capital gains tax on the sale or transfer of such securities, significantly easing the tax burden on foreign investors.
Under the revised framework, the long-term capital gains (LTCG) tax on government securities has been reduced from 12.5 per cent to zero. In addition, withholding tax on interest income from these instruments has also been scrapped, bringing it down from 20 per cent to nil. As a result, returns generated from investments in Indian sovereign debt will no longer be subject to taxation for eligible foreign investors.
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The government stated that the reforms are designed to deepen India’s capital markets and improve ease of investment for Persons Resident Outside India (PROIs) and Foreign Portfolio Investors (FPIs). Officials said the measures aim to attract stable, long-term foreign capital inflows and align India’s investment framework with global standards to enhance competitiveness.
The ordinance also extends similar tax exemptions to the Bank for International Settlements (BIS), a key international financial institution that serves as a central banking hub for global monetary cooperation. Authorities believe the changes will simplify market access and reduce compliance burdens for foreign participants in India’s sovereign debt market.
Economists and market observers suggest that the policy shift could increase demand for Indian government bonds and enhance their appeal compared to other emerging market instruments. The government expects the reforms to broaden the investor base and strengthen India’s integration with global financial markets, particularly as it seeks to position itself as a leading destination for international investment.
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