Ordinance promulated to grant tax exemption to FIIs on Capital Gains in India

New Delhi, June 6: The Government of India has promulgated the Income-tax (Amendment) Ordinance, 2026, granting tax exemption to Foreign Institutional Investors (FIIs) on Capital Gains and Interest Income arising from investments in government securities (G-Sec).

The Ordinance comes against the backdrop of Foreign Portfolio Investors (FPIs) pulling out a net Rs 2.63 lakh crore from India in the current calendar year, so far.

Also, the persistent selling by FIIs, along with high global oil prices, has put a severe pressure on the Indian Rupee (INR) which has recently been on a slide to historic lows.

The Ordinance is effective from April 1 this year, meaning that the exemption would apply to any interest or capital gains arising to FPIs on or after that date in respect of investments in G-Secs, according to a statement issued by the Finance Ministry.

According to the notification, “Any interest on Government security, and any capital gains arising from the sale, exchange or transfer of such Government security” shall be exempt in the case of “a foreign institutional investor.”

The government has decided to expand the list of specified securities under the Fully Accessible Route (FAR) to also include new issuances in Government securities.

Meaning of the Ordinance

Foreign investors are subject to a long-term Capital Gains Tax of 12.5 per cent on listed shares and bonds held longer than 12 months.

They pay a withholding tax of 20 per cent on interest earned in government bonds, which has been removed now because of the Ordinance.

So, foreign investors have an attractive, tax-free alternative to keep their dollars in India.

The move is aimed at triggering a massive ‘dollar inbox’ via the debt market to stabilise the rupee and protect the RBI’s forex reserves.

“These measures will help in the development of a smooth yield curve, and attract stable systematic inflow of long-term, patient foreign capital, including long-term investors such as pension funds, insurance companies, and sovereign wealth funds. This is also expected to boost foreign exchange inflows for the country,” the government said.