The Indian government has announced a tax exemption for Foreign Institutional Investors (FIIs) on their investments in Government securities (G-secs). The move aims to attract long-term foreign capital and deepen the G-sec market by broadening and diversifying the investor base.
As per the Income Tax (Amendment) Ordinance, 2026, the interest income earned by FIIs from G-secs is exempt from taxation. Additionally, the short-term and long-term capital gains earned by FIIs on G-secs are also exempt from taxation.
The Ordinance applies to FIIs and the Bank for International Settlements (BIS), an international financial institution owned by central banks. The exemptions will help reduce the government's borrowing costs and boost the RBI's forex reserves.
The government's decision is expected to attract long-term institutional investors, such as pension funds, insurance companies, and sovereign wealth funds, to invest in India's G-secs. This will provide them with an opportunity to earn higher returns than G-secs of developed countries.
The Central Government and RBI have also announced other reform measures to attract foreign capital into Indian G-secs, including the expansion of the Fully Accessible Route (FAR) and the inclusion of new issuances of G-secs of 15, 30, and 40-year tenures.
The debt market reforms announced by the government are expected to bring in long-term foreign capital in Indian G-secs, lower G-sec yields, increase forex reserves, and support the Indian Rupee.
