The Centre has moved to make the government bond market more attractive to global investors by scrapping capital gains tax on foreign institutional investors (FIIs) investing in government securities (G-Sec), a step aimed at bringing in stable overseas capital at a time when the rupee is under pressure and foreign money continues to exit domestic equities.
The Centre on Friday issued the Income-tax (Amendment) Ordinance, 2026, removing capital gains tax on income arising from the sale, transfer or exchange of government securities held by eligible foreign investors. Interest income earned from these securities will also be exempt from tax under specified conditions. The changes will take effect retrospectively from April 1, 2026.
The ordinance was promulgated by President Droupadi Murmu as Parliament is not currently in session. The move amends Schedule IV of the Income-tax Act, 2025, by adding government bond-related income to the list of exempt categories for foreign investors and the Bank for International Settlements.
The government's decision comes amid growing concerns over the weakening rupee and persistent foreign portfolio outflows from Indian equities. Overseas investors have withdrawn a record ₹2.6 lakh-crore from Indian stock markets so far this calendar year, including nearly ₹34,000 crore in the first three trading sessions of June alone.
The exodus has weighed heavily on the domestic currency, which has emerged as Asia's worst-performing currency this year. The rupee has depreciated by more than 6 percent in 2026 and touched an all-time low of 96.96 against the US dollar on May 20.
By removing tax hurdles on government bonds, policymakers hope to encourage foreign investors to allocate a larger share of their portfolios to Indian debt, thereby improving dollar inflows and reducing pressure on the currency.
While foreign investors have been selling Indian equities aggressively, debt markets have witnessed relatively better participation. Investors have purchased more than ₹17,000 crore worth of government securities through the Fully Accessible Route (FAR) this year.
However, debt investments under other categories remain subdued. Foreign investors have withdrawn around ₹4,000 crore under the general debt limit and another ₹340 crore through the Voluntary Retention Route (VRR).
Market participants believe the tax exemption could significantly improve post-tax returns for foreign investors, making Indian government bonds more competitive compared with other emerging market debt instruments.
Before the ordinance, foreign investors were required to pay a 12.5 percent long-term capital gains tax on gains from listed shares and bonds held for more than 12 months. They were also subject to a 20 percent withholding tax on interest income from government securities.
The latest exemption effectively removes both these tax burdens for eligible investors in government debt, potentially broadening the investor base and deepening India's bond market.
Speaking after the Reserve Bank of India's monetary policy meeting, Governor Sanjay Malhotra said the central bank would continue to intervene in currency markets when necessary to curb excessive volatility.
While reiterating that the RBI does not target any specific exchange rate, Malhotra said the central bank remains prepared to deal with speculative flows and external shocks.
"We remain confident to withstand shocks with minimum pain amid heightened global uncertainties," he said.
The rupee traded firmer ahead of the RBI policy announcement, opening at 95.71 per dollar and strengthening to an intraday high of 95.64. Market participants will now closely watch whether the tax relief succeeds in attracting sustained foreign investment into India's government bond market.