India Exempts Foreign Investors from Taxes on Government Securities to Boost Bond Market
Reforms in G-Secs market to strengthen India’s government bond market, says expert
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The Indian government has introduced the Income-tax (Amendment) Ordinance, 2026, exempting Foreign Institutional Investors from taxes on interest income and capital gains from government securities, effective April 1, 2026. This reform aims to enhance the competitiveness of India's bond market.
- 01The ordinance exempts Foreign Institutional Investors from taxes on interest income and capital gains from government securities, effective April 1, 2026.
- 02Previously, interest income from G-Secs was taxed at 20%, with short-term capital gains at 30% and long-term at 12.5%.
- 03The reform aims to attract more foreign investment into India's government bond market, enhancing liquidity and price discovery.
- 04Vineet Agrawal, co-founder of Jiraaf, believes this will make Indian sovereign debt more appealing to global investors.
- 05The move is expected to encourage a balanced investment approach between equities and bonds, especially during market volatility.
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The Indian government has enacted the Income-tax (Amendment) Ordinance, 2026, which exempts Foreign Institutional Investors (FIIs) from taxes on interest income and capital gains from government securities (G-Secs), effective April 1, 2026. This reform modifies the Income-tax Act, 2025, to include new exemptions for FIIs, aiming to enhance the attractiveness of Indian sovereign debt. Previously, foreign investors faced a 20% tax on interest income and varying rates on capital gains, which impacted their returns. Vineet Agrawal, co-founder of Jiraaf, noted that this change could significantly boost foreign inflows into India's bond market, particularly as the country gains inclusion in global bond indices. Increased FII participation is expected to deepen market liquidity and stabilize demand across the yield curve. This reform is seen as a strategic move to position Indian bonds as a stable investment option amid global uncertainties, promoting a more balanced portfolio allocation between equities and fixed income.
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The ordinance is expected to increase foreign investments in India’s government bond market, enhancing liquidity and stability in the financial system.
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