The recent financial reforms in India target attracting stable long-term foreign capital, deepening the G-Sec market, and strengthening the country’s debt market by expanding the investor base. This move is expected to bring in more foreign funding for infrastructure, manufacturing, urban development, and climate initiatives, among other national priorities. It is also aimed at enhancing market liquidity, reducing government borrowing costs, and improving the transmission of monetary policy.
To enhance the capital market, the government has introduced various reforms to increase Foreign Portfolio Investor (FPI) participation in Government Securities (G-Secs). These measures include tax exemptions on interest income, long-term capital gains (LTCG), and short-term capital gains (STCG), as well as the expansion of specified securities under the Fully Accessible Route (FAR) and streamlined investment norms.
Previously, foreign investors, including SEBI-registered Foreign Portfolio Investors (FPIs), were taxed under Section 210 of the Income-tax Act, 2025, on income earned from investments in Government Securities (G-Secs). Recognizing the significance of a competitive tax framework in attracting global capital, the government has introduced a tax exemption for FPIs/FIIs investing in G-Secs.
Under the new regime, FPIs/FIIs will be exempt from interest income earned from G-Secs and capital gains from the sale, transfer, exchange, or redemption of G-Secs. This exemption will be applicable to income generated on or after April 1, 2026. The government has also expanded the list of securities eligible under the Fully Accessible Route (FAR) to provide foreign investors with more investment opportunities in various G-Secs.
The expansion of the FAR framework to include new issuances of 15-year, 30-year, and 40-year Government Securities, as well as Sovereign Green Bonds (SGrBs) in FAR-eligible tenors, is expected to diversify investment opportunities and encourage greater participation in long-duration sovereign debt instruments. Additionally, to facilitate increased FPI participation in G-Secs, the government has eliminated short-term investment limits, concentration limits, and security-wise investment limits, while maintaining the overall investment limits at 6% of Central Government Securities and 2% of State Government Securities (SGSs).
