India simplifies foreign bond investments with tax exemption to attract steady overseas capital

India’s lower house has approved a tax exemption for foreign portfolio investors in government securities, aiming to boost the sovereign bond market and attract long-term overseas capital, with relief extended to key international financial institutions.

India’s lower house has cleared a tax change that will exempt foreign portfolio investors from income tax on interest and capital gains earned from Indian government securities, a move the finance ministry says is meant to make the sovereign bond market more attractive to overseas capital.

The Taxation and Other Laws (Amendment) Bill, 2026, passed in the Lok Sabha on Thursday, gives statutory backing to a relief first introduced through an ordinance earlier this year. Under the new framework, Foreign Institutional Investors buying government securities will not pay tax on interest income or on gains from sale, exchange or transfer, provided they supply information in the manner prescribed by the government.

According to the finance ministry, the regime had previously taxed interest from government securities at 20% for FIIs, while short-term capital gains were usually taxed at 30% and long-term gains at 12.5%. The ministry said the revised treatment is intended to bring India closer to comparable markets and to draw steadier, longer-term foreign money into government bonds. It has also argued that pension funds, insurers and sovereign wealth funds could be among the investors more likely to participate.

The legislation also extends the same relief to the Bank for International Settlements and repeals the ordinance, while preserving actions already taken under it as if they were made under the new law. Because the bill is a money bill, the Rajya Sabha can only suggest changes, not block or amend it in any binding way. The exemption is deemed to apply from April 1, 2026, except where the law specifies otherwise.