Tax relief to foreign investment in G-Secs expected to bring stable capital, help in government spending
Sources note move to help lower government borrowing cost, experts underline that along with tax relief, will help in ease of investing.
- Jun 5, 2026,
- Updated Jun 5, 2026 1:57 PM IST
The Centre’s Ordinance providing tax relief to FPI investments into Government Securities aims to ensure stable and long-term capital flows into the country.
“Foreign investment in longer-tenor government securities provides a relatively stable source of capital, supporting government spending and investment in key areas such as infrastructure, urbanisation, climate transition, manufacturing, and social sector development,” explained official sources.
A liquid government securities (G-sec) yield curve enhances price discovery, strengthens interest rate signalling, and improves the effectiveness of open market operations across different maturities, they further added.
Greater foreign participation also improves liquidity and price discovery in the G-sec market, enhancing the efficiency of the broader financial system, as G-secs serve as key benchmark rates for pricing corporate bonds, bank lending, and infrastructure financing, they said.
The Centre through an Ordinance on May 5 has exempted foreign institutional investors from payment of income tax on any capital gains or interest from investments in G-Secs with effect from April 1, 2026. Similar income-tax exemption is also provided for Bank for International Settlements (BIS) for any interest or capital gains from its investments in G-Secs.
“Recognising the importance of a competitive tax regime in attracting global capital, the government has decided to rationalise the tax treatment applicable to investments by FPIs in G-Sec,” an official release said on May 5.
At present, FIIs have to pay a 12.5% tax on capital gains and 20% withholding tax on interest earned in investments in G-Secs, based on the tax treaty, that make the Indian markets less competitive compared to global peers. The move along with other measures by the Centre and the Reserve Bank of India have taken to boost foreign capital inflows into the country’s debt market.
Sources pointed out that market-opening measures, including the Fully Accessible Route (FAR), have facilitated the inclusion of Indian government securities in global bond indices in the past, attracting passive and long-term foreign capital inflows while enhancing the credibility and global integration of the domestic bond market.
“Foreign participation broadens the investor base, increases competition in both primary auctions and secondary markets, and compresses term premia, thereby reducing the government's borrowing costs,” they further underlined.
Experts noted that the tax exemption will not only make investing easier in India’s bond markets but will also ensure easier investing norms as FPIs will not long have to file tax returns or get withholding tax deductions made.
Sunil Gidwani, Partner, Nangia Global Advisors said it addresses a long-standing friction that made Indian sovereign debt less competitive versus other major bond markets. “Beyond improving post-tax yields, the measure facilitates seamless index investing, Euroclear-style settlement structures and offshore portfolio rebalancing. Over time, it should broaden the investor base to include pension funds, sovereign wealth funds and passive index trackers, supporting durable capital inflows into India's debt market,” he said.
Nehal Sampat, Partner, Price Waterhouse & Co said the exemption is subject to FPIs "furnishing information to be prescribed", which requirements will, hopefully, be procedural in nature and not substantive. “Funds and Offshore Banking Units in IFSC, registered as FPIs, may also be eligible for the exemption. Removal of this "friction" may also assist in inclusion of Government securities in global bond indices in a larger way, which could trigger more inflows into India eventually,” she said.
Not for investments in listed equities
The Ordinance has however, not addressed representations to remove the long-term capital gains tax on investments by FPIs in listed equities. Another source pointed out that equity markets tend to function differently and the aim at present, is to get long term capital. Industry however, is likely to continue hoping that the tax on listed equities is also reviewed.
Sachin Sawrikar, Founder and Managing Partner, Artha Bharat Investment Managers noted that removing the tax friction on government securities for FPIs is a good step. “In FY26, debt was the one segment that held steady. FPIs were net sellers in equities through much of the year. This Ordinance protects what is working. But the two pools of capital are different investors with different mandates and different return expectations,” he said.
He, however, pointed out that making gilts cheaper to own does not address why long-only equity investors have been cautious on India. The capital gains structure, the currency risk, the valuation premium over peers. That is where the silence is. The real ask from foreign investors has always been on equities,” he said.
The Centre’s Ordinance providing tax relief to FPI investments into Government Securities aims to ensure stable and long-term capital flows into the country.
“Foreign investment in longer-tenor government securities provides a relatively stable source of capital, supporting government spending and investment in key areas such as infrastructure, urbanisation, climate transition, manufacturing, and social sector development,” explained official sources.
A liquid government securities (G-sec) yield curve enhances price discovery, strengthens interest rate signalling, and improves the effectiveness of open market operations across different maturities, they further added.
Greater foreign participation also improves liquidity and price discovery in the G-sec market, enhancing the efficiency of the broader financial system, as G-secs serve as key benchmark rates for pricing corporate bonds, bank lending, and infrastructure financing, they said.
The Centre through an Ordinance on May 5 has exempted foreign institutional investors from payment of income tax on any capital gains or interest from investments in G-Secs with effect from April 1, 2026. Similar income-tax exemption is also provided for Bank for International Settlements (BIS) for any interest or capital gains from its investments in G-Secs.
“Recognising the importance of a competitive tax regime in attracting global capital, the government has decided to rationalise the tax treatment applicable to investments by FPIs in G-Sec,” an official release said on May 5.
At present, FIIs have to pay a 12.5% tax on capital gains and 20% withholding tax on interest earned in investments in G-Secs, based on the tax treaty, that make the Indian markets less competitive compared to global peers. The move along with other measures by the Centre and the Reserve Bank of India have taken to boost foreign capital inflows into the country’s debt market.
Sources pointed out that market-opening measures, including the Fully Accessible Route (FAR), have facilitated the inclusion of Indian government securities in global bond indices in the past, attracting passive and long-term foreign capital inflows while enhancing the credibility and global integration of the domestic bond market.
“Foreign participation broadens the investor base, increases competition in both primary auctions and secondary markets, and compresses term premia, thereby reducing the government's borrowing costs,” they further underlined.
Experts noted that the tax exemption will not only make investing easier in India’s bond markets but will also ensure easier investing norms as FPIs will not long have to file tax returns or get withholding tax deductions made.
Sunil Gidwani, Partner, Nangia Global Advisors said it addresses a long-standing friction that made Indian sovereign debt less competitive versus other major bond markets. “Beyond improving post-tax yields, the measure facilitates seamless index investing, Euroclear-style settlement structures and offshore portfolio rebalancing. Over time, it should broaden the investor base to include pension funds, sovereign wealth funds and passive index trackers, supporting durable capital inflows into India's debt market,” he said.
Nehal Sampat, Partner, Price Waterhouse & Co said the exemption is subject to FPIs "furnishing information to be prescribed", which requirements will, hopefully, be procedural in nature and not substantive. “Funds and Offshore Banking Units in IFSC, registered as FPIs, may also be eligible for the exemption. Removal of this "friction" may also assist in inclusion of Government securities in global bond indices in a larger way, which could trigger more inflows into India eventually,” she said.
Not for investments in listed equities
The Ordinance has however, not addressed representations to remove the long-term capital gains tax on investments by FPIs in listed equities. Another source pointed out that equity markets tend to function differently and the aim at present, is to get long term capital. Industry however, is likely to continue hoping that the tax on listed equities is also reviewed.
Sachin Sawrikar, Founder and Managing Partner, Artha Bharat Investment Managers noted that removing the tax friction on government securities for FPIs is a good step. “In FY26, debt was the one segment that held steady. FPIs were net sellers in equities through much of the year. This Ordinance protects what is working. But the two pools of capital are different investors with different mandates and different return expectations,” he said.
He, however, pointed out that making gilts cheaper to own does not address why long-only equity investors have been cautious on India. The capital gains structure, the currency risk, the valuation premium over peers. That is where the silence is. The real ask from foreign investors has always been on equities,” he said.