India has spent much of 2026 watching foreign money walk out the door. Over $26.4 billion has been pulled out of Indian equities by foreign portfolio investors so far this year, already a record, having surpassed the full-year outflow of 2025. The rupee has been under sustained pressure. The RBI's growth forecast for FY 2026–27 has just been trimmed to 6.6 per cent. Against that backdrop, the reform package announced by the Ministry of Finance on June 5—headlined by a complete tax exemption on interest and capital gains for foreign investors in Indian government securities—becomes much more than a policy tweak. It represents a structural shift in how India positions its debt markets to the world.
The old problem
To understand why this matters, it helps to know the history. Interest on government securities was fully exempt from tax for FIIs until 2002. After that exemption lapsed, the government offered concessional tax treatment, at 5 per cent, for specified windows between 2013 and 2023. But outside those periods, the full weight of Indian tax law applied.
Under section 210 of the new Income-tax Act, 2025, income from securities is taxed at 20 per cent, short-term capital gains at 30 per cent, and long-term capital gains at 12.5 per cent.
However, government securities generally do not attract Securities Transaction Tax (STT), which means the concessional provisions under sections 196 and 198 of the Act, which apply only where STT has been paid, were ordinarily not available to FIIs trading in G-secs.
The result? A tax burden that puts Indian government bonds at a structural disadvantage relative to comparable sovereign bond markets in Southeast Asia and the Middle East, most of which offer full or near-full exemptions to foreign investors.
What has changed
The Income-tax (Amendment) Ordinance, 2026, published in the Gazette of India Extraordinary on June 5, inserts two new entries—Serial Nos. 13D and 13E—into Schedule IV of the Income-tax Act, 2025.
Serial No. 13D provides a complete exemption to Foreign Institutional Investors on any interest income and any capital gains arising from the sale, exchange, transfer, or redemption of Government Securities.
Serial No. 13E extends the same exemption to the Bank for International Settlements (BIS), opening the door for the Basel-based institution—which manages foreign exchange reserves for central banks globally through its BIS Investment Pool—to participate in India's G-sec market for the first time. The BIS currently has zero investment in Indian government securities.
The exemption is retroactively effective from April 1, 2026, ensuring that any FII income from G-secs in the current financial year is fully covered. Importantly, it applies to both listed and unlisted government securities and to both Central Government securities and State Government Securities (SGS). The only procedural condition attached is that FIIs must furnish information in such form and manner as may be prescribed.
The market architecture around it
The tax exemption is not a move in itself, for it is part of a coordinated package that restructures the entire architecture of FPI access to Indian government bonds. The Fully Accessible Route (FAR), i.e., the unrestricted investment channel for FPIs in G-secs, has been expanded to include new issuances in the 15-year, 30-year, and 40-year tenors, as well as Sovereign Green Bonds of FAR-eligible maturities.
The longer end of the yield curve has traditionally been where pension funds, insurance companies, and sovereign wealth funds anchor their portfolios, and their participation has been limited precisely because those instruments were outside the FAR universe.
Moreover, the three operational restrictions that applied to FPI investments under the General Route have been removed—the short-term investment cap, the concentration limit, and the security-wise limit—while the overall quantitative ceiling of 6 per cent of outstanding Central Government securities and 2 per cent of State Government securities is retained. The 'general' and 'long-term' sub-categories of the investment limit will also be merged into a single unified limit.
As of May 12, 2026, FPIs held ₹54,091 crore under the General Route (0.83 per cent of the outstanding stock of ₹64.78 lakh crore) and ₹3,21,080 crore under the FAR (6.74 per cent of ₹47.63 lakh crore). Combined, FPI holdings across both routes stood at ₹3,75,171 crore, just 3.34 per cent of the total eligible stock of ₹112.42 lakh crore. The gap between current participation and permissible limits is enormous, and the new measures are aimed squarely at closing it.
Where equity factors in
Simultaneously, the government has announced a significant liberalisation for individual Persons Resident Outside India (PROIs)—non-NRI, non-OCI foreign nationals—who were previously barred from investing in listed Indian equities through the Portfolio Investment Scheme.
Under the amendment, PROIs will now be permitted to participate, with an individual investment ceiling of 10 per cent in any single company (up from 5 per cent) and an aggregate ceiling for all PROIs of 24 per cent (up from 10 per cent).
The Department of Economic Affairs is implementing this through the Foreign Exchange Management (Non-Debt Instruments) (Third Amendment) Rules, 2026.
This means that PROIs can use the existing onboarding infrastructure already in place for NRI and OCI investors, reducing friction and compliance overhead. The government expects this to bring in a broader base of individual foreign investors who are currently locked out of direct Indian equity exposure.
India's equity markets have underperformed sharply in 2026. And this array of moves is timely. India's weight in the MSCI Global Standard Index has fallen from a peak of 21 per cent in September 2024 to 12.3 per cent today. The prolonged Iran war has pushed oil prices above $90 per barrel, squeezing India's import bill and widening the current account. Capital outflows have put sustained pressure on the rupee.
Against all of this, India needs to attract a different kind of foreign capital—the patient, long-duration money that flows from pension funds, sovereign wealth funds, and insurance companies into sovereign bonds, not the fast-moving equity capital that can exit at the press of a button.
The G-sec tax exemption is precisely targeted at that audience. Whether it succeeds will depend on how quickly the operational framework for the new provisions is put in place, and whether geopolitical conditions stabilise enough for long-term investors to act on the signal India is now sending.
