In a major bid to halt capital flight and stabilize a weakening currency, the Indian Government has issued a landmark tax exemption for Foreign Institutional Investors (FIIs) and the Bank for International Settlements (BIS).
The policy shift, enacted via the Income Tax (Amendment) Ordinance, 2026, completely eliminates taxes on interest income and capital gains generated from Government Securities (G-secs). Deemed retroactively effective from April 1, 2026, the move represents an aggressive rescue operation by fiscal authorities to defend the Indian Rupee and lower the state’s borrowing costs.
The Tax Overhaul: Before vs. After
Prior to this ordinance, foreign investors faced steep tax brackets on Indian debt, which severely dented their net returns—especially when compared to rising yields in Western markets. The ordinance completely flattens these barriers:
| Income Type from G-Secs | Taxation Before Ordinance | Taxation Under 2026 Ordinance |
| Interest Income | 20% (Withholding Tax) | Nil (Fully Exempt) |
|
Short-Term Capital Gains (STCG) (Held ≤12 months listed / ≤24 months unlisted) |
30% | Nil (Fully Exempt) |
|
Long-Term Capital Gains (LTCG) (Held >12 months listed / >24 months unlisted) |
12.5% | Nil (Fully Exempt) |
Why the Government Acted: The Economic Backdrop
The sweeping tax relief was triggered by several macroeconomic pain points that built up over the first half of 2026:
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The Rupee Under Pressure: The Indian Rupee has repeatedly hit historic lows against the US Dollar, driven by global market dynamics.
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FII Outflows: Enticed by strong US interest rates, foreign investors have been aggressively unwinding their Indian portfolios, liquidating securities, and converting rupees back to greenbacks.
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Spike in G-Sec Yields: As FIIs dumped government bonds, G-sec yields climbed significantly, raising the cost of borrowing for the Indian government.
By erasing the tax burden entirely, India is handing global asset managers a massive yield premium over developed markets like the US, Eurozone, and Japan, making Indian sovereign debt highly lucrative.
A Coordinated Strike: RBI Expands the “Fully Accessible Route” (FAR)
The tax break was not announced in isolation. In a perfectly synchronized move on June 5, 2026, the Reserve Bank of India (RBI) expanded the investment universe for foreign portfolio investors.
The RBI has widened the Fully Accessible Route (FAR)—the designated channel allowing foreigners to invest in Indian bonds without any upper ceilings. Now, all new issuances of 15-year, 30-year, and 40-year G-secs are included under the FAR. This gives long-duration global investors, such as overseas pension funds, sovereign wealth funds, and insurance giants, the exact high-maturity, long-term instruments they require to park billions of dollars cleanly.
Eyes on the Big Prize: Global Index Inclusion
The ultimate goal of this dual-pronged attack by the Ministry of Finance and the RBI is to secure India’s place in major international bond trackers.
In January 2026, Bloomberg deferred its decision to include Indian G-secs in the high-profile Bloomberg Global Aggregate Index, stating it would re-evaluate mid-year. With a decision expected imminently, these aggressive tax and structural reforms remove the primary roadblocks global index compilers had previously cited. Successful inclusion would trigger automatic, passive inflows of billions of foreign dollars into Indian debt markets, building a permanent firewall for the Rupee.
