New Delhi [India], August 7 : Foreign investors in Indian government bonds will get an income-tax exemption on interest earnings and capital gains under the Taxation and Other Laws (Amendment) Bill, 2026, which was passed in Lok Sabha on Thursday.
The Bill provides the exemption to Foreign Institutional Investors (FIIs) investing in government securities (G-Secs), covering interest earned on such securities as well as capital gains arising from their sale, exchange or transfer.
The provision is part of amendments to Schedule IV of the Income-tax Act, 2025. The exemption will be subject to FIIs furnishing information in the form and manner prescribed by the government.
The move gives legislative backing to a tax relief that was earlier introduced by the government through the Income-tax (Amendment) Ordinance, 2026.
According to the Ministry of Finance, before the change, interest income from government securities was taxable at 20 per cent for FIIs, while short-term capital gains were generally taxed at 30 per cent and long-term capital gains at 12.5 per cent.
The government subsequently exempted interest and capital gains earned by FIIs from government securities from income tax for income arising on or after April 1, 2026.
Explaining the move, the Finance Ministry had said the government had rationalised the tax treatment applicable to investments by FIIs in government securities "by exempting such investments from income tax on any interest or capital gain."
The Ministry said the move was aimed at aligning India's tax treatment of government securities with comparable jurisdictions and attracting stable and long-term foreign capital into the Indian government bond market.
It said the reforms could help attract investors such as pension funds, insurance companies and sovereign wealth funds, while also broadening the investor base and deepening India's government securities market.
The Bill passed by the Lok Sabha also repeals the Income-tax (Amendment) Ordinance, 2026. However, any action already taken under the Ordinance will be deemed to have been taken under the corresponding provisions of the new legislation.
Since the legislation is a Money Bill, the Rajya Sabha's role is limited to making recommendations. The Lok Sabha can either accept or reject those recommendations, meaning the Upper House cannot amend or block the Bill.
The legislation defines "Foreign Institutional Investor" by reference to Section 210(6)(a) of the Income-tax Act, 2025, while "Government security" has the same meaning assigned to it under the Government Securities Act, 2006.
The Bill also provides a similar exemption to the Bank for International Settlements on interest and capital gains from government securities.
Except where otherwise specified, the provisions of the legislation are deemed to have come into force from April 1, 2026.