Government Scraps Tax On FPI Gains, Interest From Government Bonds Through Ordinance

The central government has exempted foreign portfolio investors (FPIs) from paying taxes on interest income and capital gains earned from investments in government securities, issuing the Income-tax (Amendment) Ordinance, 2026, on 5 June.

The ordinance, promulgated by President Droupadi Murmu, is effective 1 April 2026. It amends Schedule IV of the Income-tax Act, 2025 and adds new categories of exempt income linked to investments in government bonds.

Removal Of Capital Gains Tax

The move removes both capital gains tax obligations for foreign investors investing in government securities. Under the earlier tax framework, FPIs paid 12.5% long-term capital gains tax (LTCG) on government bonds held for more than 12 months.

Bonds sold before completing 12 months attracted a 20% short-term capital gains tax. The ordinance abolishes both taxes.

Push For Foreign Capital

The government has announced the tax changes as part of efforts to attract overseas capital into the debt market and reduce foreign fund outflows. Officials have indicated that the measures are aimed at supporting the rupee and helping contain pressure from a widening current account deficit.

The move comes at a time when the Indian currency has remained under strain. The rupee has weakened by around 5% against the US dollar since the start of the Iran war on 28 February.

Reversal Of Earlier Tax Regime

Before the ordinance, foreign investors also paid a 20% withholding tax on interest income from government bonds. That marked a sharp increase from the earlier concessional rate of 5%, which had applied to income from government securities, state development loans and rupee-denominated bonds until 1 July 2023.

The lower 5% rate was originally introduced in 2013 when policymakers sought to stabilise the rupee during the market turbulence triggered by the so-called taper tantrum.

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According to an official explanation given earlier, the concessional rate was initially designed as a temporary measure. However, it remained in place for more than a decade before the government raised the tax rate to 20% in 2023.

At the time, the increase was intended to align taxation on interest income from debt securities more closely with the rates applicable to capital gains. With the latest ordinance, foreign investors in government securities will no longer face either withholding tax on interest earnings or capital gains tax on bond investments covered under the amended provisions.

Sources:

Moneycontrol

PIB