India's Tax Exemption to Boost Foreign Investment in Government Bonds

The Indian government has introduced an ordinance exempting Foreign Institutional Investors from taxes on interest and capital gains from government securities. This initiative aims to attract long-term foreign capital, deepen the bond market, and enhance the efficiency of sovereign debt's role in the financial sector.

The Indian government on Friday introduced the Income-tax (Amendment) Ordinance, 2026, offering tax exemptions to Foreign Institutional Investors (FIIs) on interest income and capital gains from government securities. This strategic move aims to attract stable, long-term foreign capital and boost India's bond market, especially in the absence of parliamentary sessions.

The ordinance amends Schedule IV of the Income-tax Act, 2025, exempting the interest and capital gains from taxes for FIIs, subject to specified information disclosure. The Bank for International Settlements (BIS) also benefits from this exemption. This regulatory adjustment is expected to bolster foreign involvement in India's sovereign debt, particularly in longer-tenor bonds, a vital step toward market deepening.

Foreign investment in long-term sovereign bonds aims to provide a stable capital influx supporting essential public expenditures, with potential enhancements in market liquidity and efficiency. The government's initiative aligns with ongoing efforts to better integrate Indian markets globally, potentially lowering borrowing costs by broadening the investor base and increasing market competition.