---
title: "FPI G-Sec Income Tax Exemption: What Changed in 2026"
description: "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."
author: "samuel-ortiz"
published: "2026-07-19T00:00:00.000Z"
tags: ["fpi","government-securities","tax","bonds","economy"]
canonical: "https://smartmoney.report/blog/posts/fpi-income-on-government-securities-made-tax-free-what-changed-and-why-it-matters"
---

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](https://static.pib.gov.in/WriteReadData/specificdocs/documents/2026/jun/doc202665883801.pdf) 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](https://www.pib.gov.in/PressReleasePage.aspx?PRID=2269169&lang=1&reg=1) 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](https://www.pib.gov.in/PressReleasePage.aspx?PRID=2269719&lang=1&reg=3) 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](https://static.pib.gov.in/WriteReadData/specificdocs/documents/2026/jun/doc202665884001.pdf) 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.

## Sources

1. [Government measures to deepen the G-Sec market](https://www.pib.gov.in/PressReleasePage.aspx?PRID=2269169&lang=1&reg=1) (Ministry of Finance / PIB) - checked 2026-08-23
1. [The Income-tax (Amendment) Ordinance, 2026](https://static.pib.gov.in/WriteReadData/specificdocs/documents/2026/jun/doc202665883801.pdf) (Ministry of Law and Justice) - checked 2026-08-23
1. [FAQs on FII exemption](https://static.pib.gov.in/WriteReadData/specificdocs/documents/2026/jun/doc202665884001.pdf) (Ministry of Finance) - checked 2026-08-23
1. [Reforms to expand foreign participation in G-Secs](https://www.pib.gov.in/PressReleasePage.aspx?PRID=2269719&lang=1&reg=3) (Ministry of Finance / PIB) - checked 2026-08-23