--- title: "India’s 2026 Tax Reforms for Foreign Investors in Government Securities: A Step Towards a More Competitive Sovereign Debt Market " date: 2026-08-07 author: "Siddartha Karnani" url: https://ksandk.com/banking/india-government-securities-tax-exemption-foreign-investors/ --- # India’s 2026 Tax Reforms for Foreign Investors in Government Securities: A Step Towards a More Competitive Sovereign Debt Market  Posted On - 7 August, 2026 • By - Siddartha Karnani ![Illustration of India's 2026 tax reforms for foreign investors in government securities with Parliament, rupee, charts, and global markets.](https://ksandk.com/wp-content/uploads/ChatGPT-Image-Aug-7-2026-11_54_44-AM-1.png) ## **Introduction** In a significant move to deepen foreign participation in India’s sovereign debt market, the Government of India promulgated the Income-tax (Amendment) Ordinance, 2026 on 5 June 20261, introducing a comprehensive tax exemption for eligible foreign investors investing in Government securities. Effective retrospectively from 1 April 2026, the Ordinance exempts specified income arising from Government securities from withholding tax and long-term capital gains tax, thereby addressing one of the principal tax-related barriers to foreign investment in Indian debt markets.  The tax reforms were accompanied by regulatory measures announced by the Reserve Bank of India (RBI), including the expansion of the Fully Accessible Route (FAR) to additional long-duration Government securities. Together, these measures are intended to enhance the attractiveness of Indian sovereign debt for global institutional investors, facilitate India’s integration into international bond indices, and strengthen the depth and liquidity of the domestic Government securities market.  This article analyses the key amendments introduced by the Ordinance, their interaction with the RBI’s regulatory reforms, and the broader implications for foreign investors.  ## **Background: Taxation of Foreign Investment in Government Securities** India’s Government securities market has grown substantially over the past decade and is among the largest sovereign debt markets in emerging economies. Despite this growth, foreign investor participation has remained comparatively modest due to regulatory, operational and tax-related considerations.  Before the 2026 reforms, income earned by eligible foreign investors from Government securities was subject to Indian taxation. Interest income generally attracted withholding tax, while long-term capital gains arising on the transfer of Government securities were also taxable under the Income-tax Act. These tax obligations increased compliance costs for custodians and investors and reduced the post-tax returns available to foreign institutional investors when compared with other emerging debt markets.  Although India’s inclusion in major global bond indices had already improved the visibility of its sovereign debt market, market participants consistently identified the tax regime as one of the remaining impediments to greater foreign participation.  ## **Key Changes Introduced by the Income-tax (Amendment) Ordinance, 2026** The Income-tax (Amendment) Ordinance, 2026 amends Schedule IV of the Income-tax Act, 2025 by introducing new exemption entries applicable to specified categories of investors. The principal amendment exempts eligible foreign institutional investors from tax on:  - interest earned from Government securities; and   - capital gains arising from the sale, transfer, exchange, redemption or maturity of Government securities.   The Ordinance also extends a similar exemption to the Bank for International Settlements (BIS).  Importantly, although the Ordinance came into force on 5 June 2026, the exemptions operate  retrospectively from 1 April 2026, ensuring that qualifying income earned during the intervening period also benefits from the tax relief.  The exemptions remain subject to prescribed reporting and information-furnishing requirements. At the time of writing, the Central Government is yet to notify the detailed compliance framework governing these procedural requirements. Consequently, investors and custodians should continue monitoring subsequent notifications issued under the Act.  ## **Expansion of the Fully Accessible Route** Alongside the tax reforms, the RBI announced an expansion of the Fully Accessible Route (FAR).  Introduced in 2020, FAR allows eligible non-resident investors to invest in notified Government securities without being subject to investment limits applicable under the general investment framework. The June 2026 announcement expands the range of securities eligible under FAR by including fresh issuances of 15-year, 30-year and 40-year Government securities.  The availability of long-duration sovereign bonds is particularly significant for institutional investors such as pension funds, insurance companies and sovereign wealth funds, whose investment mandates often require assets capable of matching long-term liabilities.  The RBI also announced the rationalisation of certain investment restrictions applicable under the General Route, including the removal of selected concentration limits and investment caps. Collectively, these measures reduce regulatory friction and broaden investment opportunities across India’s sovereign debt market.  ## **Impact on Foreign Investors** The combined tax and regulatory reforms materially improve the investment proposition for foreign investors.  First, the removal of withholding tax and capital gains tax enhances post-tax investment returns and reduces administrative burdens associated with tax deduction, remittance and compliance.  Secondly, expanding the universe of FAR-eligible securities increases flexibility for long-term institutional investors seeking exposure across different maturity profiles.  Thirdly, the reforms strengthen India’s competitiveness relative to other emerging market debt destinations. International investors generally evaluate sovereign debt investments based not only on yield but also on tax efficiency, operational simplicity and market accessibility. The 2026 reforms address each of these considerations simultaneously.  The immediate market response reflected growing investor confidence, with foreign portfolio investment in FAR-designated Government securities increasing following the announcement of the reforms.  ## **Implications for Global Bond Index Inclusion** The reforms also have strategic significance beyond immediate capital inflows. India has already secured inclusion in several major global bond indices, including the JPMorgan GBI-EM Global Diversified Index, the Bloomberg Emerging Market Local Currency Government Index, and the FTSE Russell Emerging Markets Government Bond Index. Inclusion in these benchmarks has increased passive investment into Indian Government securities.  The Government’s latest tax reforms are also expected to support India’s efforts towards inclusion in the Bloomberg Global Aggregate Bond Index, one of the world’s most widely tracked fixed-income benchmarks. Market commentators have previously identified withholding tax administration as one of the operational issues affecting India’s eligibility for broader index inclusion. By exempting qualifying income from tax, the Ordinance removes a significant operational complexity for global investors and custodians, while complementing the RBI’s ongoing efforts to simplify market access.  Although certain operational issues such as settlement infrastructure and international clearing mechanisms continue to evolve, the reforms represent an important step towards aligning India’s sovereign debt market with international investment standards.  ## **Key Considerations for Investors** While the reforms significantly improve the investment landscape, certain legal and compliance considerations remain relevant. The detailed reporting requirements for claiming the exemptions are yet to be prescribed by the Central Government. Investors should therefore closely monitor subordinate legislation and administrative guidance issued under the Income-tax Act.  Additionally, the Ordinance was promulgated under Article 123 of the Constitution of India. As with all Ordinances, it must be laid before Parliament and will cease to operate after the constitutionally prescribed period unless replaced by legislation enacted by Parliament.  Foreign investors should also continue to evaluate applicable regulatory requirements under the RBI framework, SEBI regulations governing foreign portfolio investors, and operational procedures prescribed by custodians and depositories.  ## **Conclusion** The Income-tax (Amendment) Ordinance, 2026 represents one of the most significant policy interventions in India’s sovereign debt market in recent years. By exempting eligible foreign investors from tax on interest and capital gains arising from Government securities, the Government has removed a longstanding tax-related barrier that affected both investment returns and operational efficiency.  When read alongside the RBI’s expansion of the Fully Accessible Route, the reforms demonstrate a coordinated policy approach aimed at strengthening India’s position within global fixed-income markets. Improved tax efficiency, broader access to long-duration Government securities and reduced regulatory friction are expected to encourage greater participation by global institutional investors while supporting the continued internationalisation of India’s sovereign debt market.  Although certain procedural aspects, including the detailed compliance framework under the Ordinance, remain to be notified, the reforms substantially improve the legal and commercial landscape for foreign investment in Indian Government securities. For international investors evaluating exposure to India’s sovereign debt market, the 2026 reforms mark a significant step towards a more transparent, accessible and globally competitive investment environment.  ## **Frequently Asked Questions** ### 1. What is the Income-tax (Amendment) Ordinance, 2026? It is an ordinance promulgated by the Government of India on 5 June 2026 under Article 123 of the Constitution, which amends Schedule IV of the Income-tax Act, 2025 to exempt eligible foreign investors from tax on income earned from Government securities. ### 2. From when is the tax exemption effective? The exemption applies retrospectively from 1 April 2026, even though the Ordinance itself came into force on 5 June 2026. This means qualifying income earned in the intervening period also gets the benefit. ### 3. What kind of income is exempted under the Ordinance? Two categories are covered: interest earned from Government securities, and capital gains arising from the sale, transfer, exchange, redemption or maturity of Government securities. ### 4. Who qualifies for this tax exemption? The exemption applies to eligible foreign institutional investors, along with a similar exemption extended to the Bank for International Settlements (BIS). ### 5. Do investors need to meet any compliance requirements to claim the exemption? Yes. The exemption is subject to prescribed reporting and information-furnishing requirements. However, the Central Government has not yet notified the detailed compliance framework, so investors and custodians need to track further notifications under the Act. *Last Updated on 7 August, 2026* Get King Stubb & Kasiva’s legal updates in your Google feed[![Add King Stubb & Kasiva as a preferred source on Google](https://ksandk.com/wp-content/uploads/google_preferred_source_badge_light_en@2x.png)](https://www.google.com/preferences/source?q=https://ksandk.com/) --- ## Office Locations - [New Delhi](https://ksandk.com/locations/top-corporate-law-firm-in-delhi/) (HQ): +91-11-41318190 | info@ksandk.com - [Mumbai](https://ksandk.com/locations/top-corporate-law-firm-in-mumbai/): 3 offices (Nariman Point, Lower Parel, Andheri) | mumbai@ksandk.com - [Bangalore](https://ksandk.com/locations/top-corporate-law-firm-in-bangalore/): bangalore@ksandk.com - [Chennai](https://ksandk.com/locations/chennai/): chennai@ksandk.com - [Hyderabad](https://ksandk.com/locations/hyderabad/): hyderabad@ksandk.com - [Pune](https://ksandk.com/locations/pune/): pune@ksandk.com - [Kochi](https://ksandk.com/locations/kochi/): kochi@ksandk.com ## Contact - [Contact Page](https://ksandk.com/contact-us/) - General: info@ksandk.com | +91-11-41318190 - WhatsApp: +91-7428567444 - [Privacy Statement](https://ksandk.com/privacy-statement/) - [Terms of Use](https://ksandk.com/terms-of-use/)