India’s government has taken a bold step to attract foreign capital. The President promulgated the Income-Tax (Amendment) Ordinance, 2026 on June 5, 2026. It was published in the Gazette of India on the same day.

Furthermore, the Ordinance amends the Income-tax Act, 2025. It introduces two new entries — 13D and 13E — into Schedule IV of the Act. Consequently, Foreign Institutional Investors (FIIs) are now fully exempt from tax on Government Securities.

Additionally, the Bank for International Settlements (BIS) has received the same exemption under entry 13E. This is the Basel-headquartered institution established at the Hague Conference in 1930.

The Ordinance route was chosen because Parliament was not in session. Under Article 123 of the Constitution, the President can issue an Ordinance when immediate action is necessary. Therefore, the government did not wait for the next parliamentary session.

Moreover, the amendment was made retrospectively from April 1, 2026. This ensures no FII faces tax liability on G-Sec income earned during the current financial year.

Previously, FIIs faced a 12.5% long-term capital gains tax on listed government securities. In addition, interest income attracted a 20% withholding tax. Both of these have now been completely removed.

However, there is a compliance condition attached. The exemption applies only when the FII furnishes information in the prescribed form and manner. In other words, the relief is conditional on disclosure compliance.

Meanwhile, FPIs registered with SEBI are treated as FIIs under this law. They invest in G-Secs through the General Route and the Fully Accessible Route (FAR). As a result, a wide range of foreign investors stand to benefit from this change.

Foreign Portfolio Investors pulled out a net ₹2,63,784 crore from India so far in 2026. Global uncertainty and geopolitical tensions have driven these outflows. Therefore, the government felt urgent action was needed to reverse the trend.

According to the Ministry of Finance, this relief will attract “stable, systematic inflows of durable, patient foreign capital.” Specifically, it targets long-term investors such as pension funds, insurance companies, and Sovereign Wealth Funds (SWFs).

In conclusion, this move aligns India’s tax treatment of sovereign debt with several global markets. Those markets already offer favourable tax treatment to foreign investors. Consequently, India’s government bond market becomes significantly more competitive internationally.