To woo foreign investors, govt gives tax exemption on interest, gains from securities

A similar exemption was extended to the Bank for International Settlements (BIS) — an international financial institution owned by central banks and serving as a forum for monetary and financial cooperation. The BIS also acts as a banker and asset manager for central banks and international organisations.

The exemption will be applicable from April 1, 2026, says the Income-tax (Amendment) Ordinance, 2026, promulgated by President Droupadi Murmu today. The ordinance amends the Income-tax Act, 2025.

Issued while Parliament is not in session, it inserts two new entries —13D and 13E — in Schedule IV of the Income-tax Act. Under the amended provisions, interest earned on government securities and capital gains arising from their sale, exchange or transfer will be exempt from income tax for eligible FPIs and the BIS.

The Ministry of Finance said the move would ensure a stable and systematic inflow of durable foreign capital and long-term investors such as pension funds, insurance companies and sovereign wealth funds.

The second major reform notified today pertains to individual Persons Resident Outside India (PROI).

"PROIs will be permitted to invest in equity instruments of listed Indian companies through the Portfolio Investment Scheme, which was hitherto available only to NRIs and OCIs. The investment limit will be increased for an individual PROI under this scheme from 5 per cent to 10 per cent in any company, with an overall investment limit for all individual PROIs to 24 per cent, from the current 10 per cent," the ministry said.

The third reform relates to the regulatory framework around FPI investment in government securities.

"With the view to enhance participation by FPIs in G-Secs, 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 in tenors of 15, 30 and 40 years, as also Sovereign Green Bonds in the tenors of FAR-eligible securities," the ministry said.

The FAR is an RBI mechanism under which foreign investors can buy a specified set of government securities without restrictions that apply to others.

To further protect the sovereign bond market from global crises' impact, the ministry has removed restrictions that currently exist on FPI investments under the general route.

"It has now been decided to remove three restrictions — the short-term investment limit, the concentration limit and the security-wise limit — for investments by FPIs in government securities, while retaining the overall quantitative investment limit of 6 per cent of the outstanding stock of the Central government securities and 2 per cent of the state government securities," the government explained.

The government said taken together, these reforms would reduce operational complexities, simplify market access and provide a more seamless investment experience comparable with leading international financial markets.

"These measures are expected to expand the investor base for Indian equities and government securities and encourage wider participation from global investors seeking exposure to one of the world's fastest-growing major economies," said the government.

Importantly, current levels of investments from the BIS in G-Secs are nil.

With today's reforms, the following income of the BIS will be exempted from tax — interest income earned from government securities and capital gains arising on transfer or redemption of government securities.

Asked if there are other international entities like the BIS granted similar exemptions in the Act, the government said yes and listed the European Economic Community, the central bank of any country, Nordic Investment Bank and European Investment bank.