Govt removes capital gains tax on FIIs, BIS investments in G-Secs

In a move aimed at deepening foreign participation in India’s debt markets, the government has announced the Income-Tax (Amendment) Ordinance, 2026. The ordinance, effective retrospectively from April 1, 2026, exempts interest and capital gains on government securities from income tax for certain foreign investors, while also removing withholding tax obligations.

Who benefits

The exemptions apply to two specific categories of entities:

1. Foreign Institutional Investors as defined under the relevant provisions of the Income-Tax Act, 2025,  
2. The Bank for International Settlements- an institution established in 1930 and headquartered in Basel, Switzerland.

What the ordinance says

The amendment inserts two new entries, 13D and 13E, into Schedule IV of the Income-Tax Act, 2025. Under these provisions, interest earned on Government securities, as well as capital gains arising from their sale, exchange, or transfer, are now exempt from income tax for eligible entities.

There will also be no withholding tax on such investments, removing a layer of friction that has historically complicated foreign participation in India's bond markets.

To avail of these exemptions, eligible entities are required to submit information in a prescribed form and manner, ensuring that regulatory oversight and transparency are maintained.