New Delhi, June 5 (HS): The Central Government has abolished all taxes on income and gains earned by foreign investors from investments in Indian government securities, in a move aimed at making the country's sovereign debt market more attractive to global capital. The changes will come into effect from April 1, 2026.

The government has decided to eliminate the Long-Term Capital Gains Tax (LTCG) on investments made by Foreign Institutional Investors (FIIs) in Government Securities (G-Secs). According to the Finance Ministry, an ordinance has been promulgated in this regard. The primary objective of the measure is to increase the inflow of foreign currency into the country.

The ministry stated that FIIs will now receive complete tax exemption on both interest income and capital gains earned from Government Securities. To implement the decision, the Government of India has promulgated the Income Tax (Amendment) Ordinance, 2026, which was issued on June 5. The provisions will be deemed effective from April 1, 2026.

Union Finance and Corporate Affairs Minister Nirmala Sitharaman had announced in the Union Budget for FY 2026-27 that Persons Resident Outside India (PROI) would be permitted to invest in shares and securities of listed Indian companies through the Portfolio Investment Scheme (PIS). Previously, this facility was available only to Non-Resident Indians (NRIs) and Overseas Citizens of India (OCIs).

According to the ministry, the ordinance amends the Income Tax Act to provide this exemption. The government has chosen to remove capital gains tax on government securities to attract long-term and stable foreign capital, as these investment instruments generally have longer maturities.

The decision comes at a time when foreign investors have withdrawn a substantial ₹2.6 lakh crore from the domestic equity market so far this year, significantly higher than the ₹1.66 lakh crore withdrawn in 2025. Global economic uncertainties have been cited as the primary reason for the outflows. In the first three days of June alone, foreign investors reportedly pulled out nearly ₹34,000 crore from equities, putting additional pressure on the Indian rupee.

Despite the equity outflows, foreign investors have invested more than ₹17,000 crore in the debt market through the Fully Accessible Route (FAR). However, they have withdrawn nearly ₹4,000 crore under the general debt limit and around ₹340 crore through the Voluntary Retention Route (VRR) so far this year.

At present, FIIs are required to pay Long-Term Capital Gains Tax at a rate of 12.5 percent on gains arising from both equity and debt investments. The latest exemption is expected to improve the attractiveness of Indian sovereign debt instruments among global investors.

It is noteworthy that the Reserve Bank of India has separately allowed certain long-term sovereign bonds to be included under the Fully Accessible Route, enabling foreign investors to invest in them without any quantitative restrictions. The last revision to the list of government securities eligible under this route was made in 2024, when the central bank removed the 14-year and 30-year bond categories.

The move also comes amid concerns over rising crude oil import costs linked to the ongoing West Asia crisis. Last month, Prime Minister Narendra Modi urged citizens to help conserve foreign exchange reserves in light of increasing energy import expenses.

Hindusthan Samachar / Jun Sarkar