NEW DELHI: After days of speculation, the government on Friday bit the bullet and announced tax relief for foreign investors. It took the ordinance route to grant exemptions on interest income and capital gains earned from investments in government securities by Foreign Institutional Investors (FIIs). However, no relief was extended to investments in equities. Hours later, the Reserve Bank of India (RBI) unveiled a slew of measures aimed at attracting foreign capital. Together, these steps are expected to support the rupee, which has been under pressure in recent months.
The ordinance amends the Income-tax Act, 2025 to exempt interest earned on government securities, as well as capital gains arising from their sale, exchange or transfer, from income tax for FIIs, subject to the furnishing of prescribed information to tax authorities. It takes effect retrospectively from April 1, 2026.
At present, FIIs or Foreign Portfolio Investors (FPIs) face a 20% withholding tax on interest income earned from Indian debt securities, including government bonds and rupee-denominated bonds. Long-term capital gains on government securities are currently taxed at 12.5%, while short-term capital gains attract a 20% tax.
The tax relief is expected to make government bonds attractive for foreign investors at a time when India is seeking deeper integration with global debt markets.