09 Jun 2026
India has introduced a series of regulatory and tax reforms to enhance foreign participation in its sovereign debt market. Alongside the RBI’s measures to expand access to Government Securities and liberalise investment restrictions, the Income-tax (Amendment) Ordinance, 2026, provides eligible Foreign Portfolio Investors with a complete exemption from Indian tax on both interest income and capital gains arising from investments in Government Securities.
These developments are expected to strengthen the appeal of Indian sovereign debt to global investors and further deepen India’s capital markets.
Partners: Ananya Sonthalia and Komal Dani, Senior Associate: Ketki Redkar, Associate: Niraj Chowdhury
In a significant move to deepen India’s sovereign debt market and strengthen its appeal to global investors, the Reserve Bank of India (RBI) has recently introduced a series of measures to improve foreign participation in Government Securities (G-Secs). These measures enhance market access to attract long-term foreign capital, diversify the investor base, and support the government’s borrowing programme.
Complementing the RBI’s market-access reforms, the President of India has promulgated the Income-tax (Amendment) Ordinance, 2026 (Ordinance No. 2 of 2026) (Ordinance), which provides a complete tax exemption in respect of certain investments made by Foreign Portfolio Investors (FPIs) in G-Secs.
These developments are discussed below.
The RBI has widened the scope of the Fully Accessible Route by permitting investments in all newly issued 15-year, 30-year and 40-year G-Secs. This expands the universe of sovereign debt instruments available to foreign investors without investment restrictions.
The RBI has also proposed removing the concentration limits applicable to FPI investments in G-Secs under the general route. The move is expected to provide greater flexibility to large institutional investors and reduce investment constraints for investors seeking meaningful exposure to Indian sovereign debt.
Separately, the RBI has consolidated the debt instruments in which Non-Resident Indians (NRI) can invest under the relevant Master Directions, streamlining the regulatory framework for NRI participation in debt markets.
Position prior to the Ordinance
Prior to the Ordinance, income earned by FPIs from investments in G-Secs was taxable in India under the domestic tax regime.
In particular:
These domestic rates were subject to applicable surcharge and cess and could be reduced where relief was available under an applicable tax treaty.
Position under the Ordinance
The Ordinance fundamentally alters the tax treatment of investments made by eligible FPIs in G-Secs with effect from 1 April 2026.
Under the amended provisions, a complete exemption from Indian taxation has been provided in respect of:
The exemption represents a significant departure from the earlier framework under which FPIs were required to rely on concessional domestic tax rates or treaty-based relief to mitigate Indian tax costs. Eligible FPIs are now exempt from Indian taxation on both recurring returns and exit gains arising from qualifying investments.
Conditions for availing the tax exemption
The exemption is conditional upon the furnishing of information in such form, manner and within such time as may be prescribed by the central government.
The detailed reporting requirements, procedural framework and prescribed forms are expected to be notified separately.
The introduction of a complete exemption from Indian taxation on both interest income and capital gains is expected to materially enhance the post-tax returns available to FPIs investing in G-Secs. By eliminating Indian tax leakage on both periodic returns and exit gains, the measure may improve the competitiveness of Indian sovereign debt relative to comparable emerging market fixed-income products.
When viewed alongside the RBI’s efforts to improve accessibility and liquidity in G-Secs, the tax and regulatory reforms appear to support broader policy objectives, including diversification of the investor base, increased foreign participation in sovereign debt markets and more efficient execution of the government’s borrowing programme.
While the procedural requirements for claiming the exemption are yet to be prescribed, the reform represents one of the most significant tax incentives for foreign investment in Indian G-Secs in recent years.
The exemption may be particularly attractive for long-term institutional investors such as sovereign wealth funds, pension funds and global asset managers. It eliminates the requirement of reliance on treaty-based relief and would also obviate associated compliances, such as furnishing tax residency certificates or establishing treaty eligibility. The exemption further decreases tax-related uncertainty and potential litigation exposure that has historically arisen from competing interpretations regarding the taxation of foreign investors, thereby enhancing the predictability of investment outcomes.
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