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FPI G-Sec Income Tax Exemption: What Changed in 2026
India exempted eligible FPI interest and capital gains from G-Secs for income arising from April 1, 2026. See the law, scope and retained limits.
India now exempts qualifying foreign institutional investors, including eligible foreign portfolio investors, from income tax on interest and capital gains from Government securities. The exemption applies to qualifying income arising on or after April 1, 2026, including income from securities acquired earlier when the statutory conditions are met.
What does the tax exemption cover?
The Income-tax (Amendment) Ordinance, 2026 added the exemption to the Income-tax Act, 2025. It covers:
- interest from Government securities; and
- capital gains from the sale, exchange, transfer or redemption of Government securities.
The effective-date test is based on when the income arises. The Ministry of Finance announcement says the exemption applies to interest or capital gains arising on or after April 1, 2026; it is not limited to securities purchased from that date.
How did the previous tax treatment work?
| Income or gain | Position before the exemption | Position for qualifying income from April 1, 2026 |
|---|---|---|
| G-Sec interest | 20% for FIIs/FPIs | Exempt |
| Short-term capital gain | Generally 30%; 20% for specified section 196 transactions | Exempt |
| Long-term capital gain | 12.5% | Exempt |
The holding-period classification was not a universal 12 months. The official Government backgrounder identifies more than 12 months for listed G-Secs and more than 24 months for unlisted G-Secs. Transaction facts and treaty eligibility can affect a taxpayer’s position, so this summary is general information rather than tax advice.
Which investment restrictions changed?
Under the General Route, the Government removed three restrictions: the short-term investment limit, concentration limit and security-wise limit. It did not remove the overall quantitative limits.
| General Route limit | Retained overall cap |
|---|---|
| Central Government securities | 6% of outstanding stock |
| State Government securities | 2% of outstanding stock |
The Government also decided to add new 15-, 30- and 40-year Central Government securities, plus eligible-tenor Sovereign Green Bonds, to the Fully Accessible Route. This route is distinct from the General Route limits shown above.
Which legal instrument made the tax change?
The tax exemption was made through the Income-tax (Amendment) Ordinance, 2026. The Foreign Exchange Management (Non-Debt Instruments) (Third Amendment) Rules, 2026 concern the separate liberalisation of listed-equity investment by individual persons resident outside India; they are not the legal vehicle for the G-Sec income-tax exemption.
The exemption is specific to eligible foreign investors and qualifying G-Sec income. It does not create a general G-Sec tax exemption for resident investors. The Ministry’s FII exemption FAQ should be read alongside the Ordinance, and a taxpayer should obtain professional advice for treaty, classification or filing questions.
Policy details were rechecked against the official Ordinance, Ministry announcement and FAQ on August 23, 2026.
Frequently asked questions
What FPI income from government securities became exempt?
Eligible FIIs, including qualifying SEBI-registered FPIs, are exempt from Indian income tax on interest from Government securities and capital gains from their sale, exchange, transfer or redemption. The exemption applies to qualifying income arising on or after April 1, 2026.
Does the exemption cover G-Secs bought before April 1, 2026?
Yes, if the statutory conditions are met. The effective-date test applies to when the interest or capital gain arises, not only to when the security was purchased. Qualifying income arising on or after April 1, 2026 can therefore include earlier holdings.
Did the Government remove every FPI limit on G-Secs?
No. It removed the short-term, concentration and security-wise restrictions under the General Route, but retained the overall quantitative limits: 6% of outstanding Central Government securities and 2% of outstanding State Government securities. Fully Accessible Route securities operate under a separate framework.
Does this exemption apply to resident retail investors?
The new exemption is specifically framed for eligible foreign institutional investors and qualifying Government-security income. It does not create a general exemption for resident investors. Individual tax outcomes depend on the applicable law and facts, so investors should obtain professional tax advice where needed.
Sources
- Government measures to deepen the G-Sec market Ministry of Finance / PIB checked 23 August 2026
- The Income-tax (Amendment) Ordinance, 2026 Ministry of Law and Justice checked 23 August 2026
- FAQs on FII exemption Ministry of Finance checked 23 August 2026
- Reforms to expand foreign participation in G-Secs Ministry of Finance / PIB checked 23 August 2026
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