Govt rolls out tax bonanza for foreign investors in G-Secs

In a major move to attract foreign investors towards Indian government bonds, the government has announced an ordinance exempting foreign portfolio investors (FPIs) from paying income tax on interest earned or capital gains arising from such investments in government securities (G-Secs), effective April 1, 2026, retroactively.

“The Ordinance intends to attract foreign investments into government securities which will improve liquidity in government securities market and help in reducing government borrowing cost by facilitating deeper integration with international bond markets,” the finance ministry said.

Financial advisers said the latest ordinance eliminates a key structural disadvantage for foreign investors investing in Indian G-sec.

“Essentially, it brings parity with many other major government bond markets across the globe, thus opening the floodgates of foreign funds into India’s G-sec market,” said Vishwas Panjiar, Managing Partner, SVAS Business Advisors LLP.

“The Ordinance removes a structural tax friction that for years pushed foreign investors into treaty-based holding structures simply to preserve an acceptable post-tax return on Indian Government Securities. By exempting both interest income and capital gains in the same instrument, the move effectively closes the gap between gross yield and post-tax yield. For a sovereign wealth fund or pension mandate running an initial investment screen, that is a material change in how Indian sovereign paper gets evaluated,” Panjiar said.

Panjiar further said that tax was never the sole constraint on foreign participation in this market. Global bond investors trade in full lifecycle: entry economics, currency risk management and exit certainty. The more persistent friction has been the cost of Rupee hedging.

“In several cycles, the onshore forward premium has consumed the entire yield differential over US Treasuries before any tax consideration becomes relevant. The exemption improves the return profile; it does not neutralise that currency arithmetic,” Panjiar added.

“The Government is making a fiscal trade off here by consciously accepting revenue forgone on foreign holdings in exchange for the hope of lower sovereign borrowing costs and a broader international investor base. Whether that gamble actually leads to the intended outcome remains to be seen. That depends on what else follows: deeper secondary market liquidity, Euroclear compatible settlement infrastructure, and more accessible currency hedging mechanisms. Tax reform gets India into the conversation. Market infrastructure determines whether capital actually gets allocated. Investors optimise on the yield economics when they enter the market – they price their risk on the exit,” Panjiar said.

Sunil Gidwani, Partner- Financial Services, Nangia Global, said, “The government has recognised the need to keep our interest rates competitive among other countries. This much-awaited reform exempts FPIs from any taxation on interest income and capital gains on investment in Government Securities. This exemption addresses a long- standing issue that made Indian sovereign debt less competitive among other major bond markets. As India integrates with global bond indices and looks for stable foreign capital for the long term, this exemption has come at the right time.”

Gidwani further said, “Apart from improving post tax yields for foreign investors, this measure paves the way for index investors to participate without any tax hassles such as seamless index investing, Euroclear-style settlement structures for G-Secs and even easier offshore portfolio rebalancing. This would broaden the investor base for Government Securities to include passive index trackers and bring durable capital flows into India’s debt market.”

Presently FPIs are subject to capital gains tax and withholding tax on interest income on G- Secs and corporate bonds. The Ordinance will apply only with respect to investment in G-Secs. Both capital gains tax and withholding tax on interest income are being done away with effect from April 1, 2026.