Over the past few months, the Indian Rupee has been regularly hitting new lows. Yields on government securities (G-Secs) are rising. Foreign institutional investors (FIIs) are withdrawing money from India and taking US dollars back to their country. The government is taking several steps to prevent FIIs from selling Indian securities and instead encourage them to invest fresh funds in India. On 5 June 2026, the government announced tax relief for FII investments in G-Secs. In this article we will understand the details of this step.
tax exemption
The government announced the Income Tax (Amendment) Ordinance, 2026 to amend the Income Tax Act, 2025. As per the amendment, the government has made the following changes.
- tax exemption on interest income
Interest income earned by FIIs from government securities (G-Secs) is exempt. Earlier, this interest income was subject to 20% withholding tax.
2. tax exemption on capital gains
There is exemption on short-term and long-term capital gains earned by FIIs on government securities. Earlier, short-term capital gains (STCG) were taxed at 30%. Long-term capital gains (LTCG) were taxed at 12.5%.
A listed G-Sec is classified as a long-term capital asset if it is held for more than 12 months, and an unlisted G-Sec is classified as a long-term capital asset if it is held for more than 24 months. Similarly, if a G-Sec is held for 12 months or less, it is classified as a short-term capital asset, and an unlisted G-Sec if held for 24 months or less, it is classified as a short-term capital asset.
The ordinance changes can be summarized as follows.
type of income |
taxation as per ordinance |
taxation before ordinance |
|
interest income from government securities |
Zero |
20% |
|
short term capital gains tax |
Zero |
30% |
|
long term capital gains tax |
Zero |
12.5% |
Along with FIIs, the above exemptions also apply to the Bank for International Settlements (BIS). BIS is an international financial institution owned by central banks. It acts as a banker and asset manager for central banks and international organizations.
This ordinance is considered to be in force from 1 April 2026.
impact of government measures
The government’s decision to exempt FIIs and BIS from taxation on income from government securities, along with its other reforms, aims to strengthen India’s position as a leading destination for global investment. The government hopes that these measures will attract long-term foreign capital and deepen the G-Sec market by broadening and diversifying the investor base.
With these measures, the government hopes to attract long-term institutional investors such as pension funds, insurance companies, sovereign wealth funds, etc. to invest in India’s G-Secs. These investors are expected to bring steady, sustained foreign capital inflows into India, which could reduce the government’s borrowing costs. Foreign capital inflows will boost RBI’s foreign exchange reserves and also help stabilize the Indian rupee against the US dollar and other global currencies.
Other reform measures for FII investment in government securities
The central government and the RBI worked in coordination to announce steps to attract foreign capital into Indian government securities on June 5, 2026. While the government announced the ordinance, the RBI Governor announced in his monetary policy statement that the scope of ‘specified securities’ will be expanded, for government securities under the fully accessible route (FAR).
All new issuances of government securities with tenors of 15, 30 and 40 years will be included in the FAR. FPIs invest in Indian government securities through FAR and normal route. This move will increase investment opportunities for foreign investors in a wide range of government securities. The availability of higher-maturity options will encourage greater participation in long-term government securities.
Inclusion of Indian Government Securities in global indices
Reform measures by the Central Government and RBI are expected to help in greater inclusion of Indian government securities in global indices. In January 2026, Bloomberg postponed the decision to include Indian government securities in the Bloomberg Global Aggregate Index. It said it would consider the matter in mid-2026. The decision is expected in the near future.
The tax exemption ordinance of the central government and the broadening of G-Sec investment options for foreign investors by the RBI are expected to boost the chances of inclusion of Indian G-Secs in the Bloomberg index this time.
Credit market reforms: a win-win for all
The debt market reforms announced by the government will bring long-term foreign capital into Indian government securities. This will help reduce G-sec yields, increase forex reserves and support the Indian rupee. This will increase the possibility of inclusion of Indian government securities in global indices.
For foreign investors, this will provide them an opportunity to invest in Indian government securities and earn higher returns than government securities of developed countries like US, Japan, EU etc. This will provide an attractive investment opportunity for long-term foreign institutional investors, such as pension funds, insurance companies, sovereign wealth funds, etc. Thus, it is a win-win for both the stakeholders: foreign investors and the Government of India.