Tax Exemption for FPIs/FIIs on Government Securities from 1 April 2026

Introduction

The Government has introduced an important tax relief for Foreign Institutional Investors (FIIs), including SEBI-registered Foreign Portfolio Investors (FPIs), investing in Indian Government Securities. The change is aimed at encouraging greater foreign participation in India’s debt market.

What Has Changed?

As per the Income-tax (Amendment) Ordinance, 2026, No. 2 of 2026, promulgated on 05-06-2026, Schedule IV of the Income-tax Act, 2025 has been amended to insert new exemption entries for specified income from Government Securities.

The Ordinance provides that the following income may be exempt from tax:

• Interest on Government Securities

• Capital gains arising from sale, exchange or transfer of such Government Securities

Who Can Claim the Exemption?

The exemption is available to:

• Foreign Institutional Investors, as defined under Section 210(6)(a) of the Income-tax Act, 2025

• Bank for International Settlements

For practical purposes, the reform is especially relevant for FIIs/FPIs investing in Indian Government Securities.

Effective Date

The Ordinance states that it shall be deemed to have come into force from 1 April 2026. Therefore, the exemption applies from the financial year beginning 1 April 2026, subject to the prescribed conditions.

Important Condition

The exemption is not automatic without compliance. As per the Ordinance, the exemption is subject to furnishing information in such form and manner as may be prescribed.

This means eligible FIIs/FPIs should ensure:

• Proper classification as an eligible Foreign Institutional Investor/FPI

• Accurate reporting of interest income and capital gains

• Maintenance of investment and transaction records

• Compliance with prescribed reporting requirements once notified

Meaning of Government Security

For this exemption, “Government security” has the same meaning as assigned under Section 2(f) of the Government Securities Act, 2006.

Why This Matters

This reform can improve the post-tax return for foreign investors investing in Indian Government Securities. It may also help increase liquidity in India’s G-Sec market and make Indian sovereign debt more attractive to global institutional investors.

Conclusion

FIIs/FPIs investing in Indian Government Securities should review their investment structures, tax positions, and reporting systems in light of this amendment. Since the exemption is subject to prescribed information filing requirements, compliance will be critical.

For expert guidance on this topic, contact your tax professional today.