The central government has issued the Income‑tax (Amendment) Ordinance, 2026, exempting foreign investors from paying taxes on interest income and capital gains arising from investments in government securities. Effective April 1, 2026, the ordinance modifies Schedule IV of the Income‑tax Act, 2025, to include new entries that exempt Foreign Institutional Investors (FIIs) from taxes on “any interest on Government security” and “any capital gains arising from the sale, exchange, or transfer of such Government security,” subject to specified disclosure requirements.
This exemption has also been extended to the Bank for International Settlements (BIS), with the condition of filing information in prescribed forms. Foreign investors, including FIIs, will now be exempt from a long‑term capital gains tax (LTCG) of 12.5 percent on government bonds held for over 12 months and a short‑term capital gains tax of 20 percent for bonds held for less than a year. Additionally, withholding tax on interest income earned by foreign investors on government securities has been eliminated.
Furthermore, for Foreign Portfolio Investors (FPIs) investing under the General Route, the government will eliminate three restrictions – short-term investment limit, concentration limit, and security-wise limit for investments in G-secs. However, the overall quantitative investment limit of 6 percent of the outstanding stock of Central Government securities and 2 percent of State Government securities (SGSs) will be retained. These measures aim to facilitate the development of a smooth yield curve and attract stable systematic inflow of long-term foreign capital, including from pension funds, insurance companies, and sovereign wealth funds.
These changes are intended to enhance foreign capital inflows, reduce outflows, support the rupee, and manage the widening current account deficit.
