Lok Sabha Passes Bill Exempting Foreign Investors in Govt Bonds from Income Tax

The Lok Sabha on Thursday passed the Taxation and Other Laws (Amendment) Bill, 2026, which grants a full income-tax exemption to foreign institutional investors (FIIs) on interest earned from Indian government securities and on capital gains arising from their sale, exchange, or transfer.

The exemption applies to investments in government securities (G-Secs) and is part of amendments to Schedule IV of the Income-tax Act, 2025. FIIs will need to furnish information in the form and manner prescribed by the government to avail the benefit.

This legislative move formalises a tax relief that was earlier introduced through the Income-tax (Amendment) Ordinance, 2026. Before the change, FIIs were taxed at 20% on interest income from government securities, while short-term capital gains were taxed at 30% and long-term gains at 12.5%.

The Finance Ministry has said the rationalisation aligns India's tax treatment of government securities with comparable jurisdictions, aiming to attract stable, long-term foreign capital—such as pension funds, insurance companies, and sovereign wealth funds—and deepen the government securities market.

The Bill also repeals the Income-tax (Amendment) Ordinance, 2026, while deeming any actions taken under the Ordinance as having been taken under the new legislation. Since it is a Money Bill, the Rajya Sabha can only make recommendations, which the Lok Sabha may accept or reject.

The legislation defines "Foreign Institutional Investor" by reference to Section 210(6)(a) of the Income-tax Act, 2025, and "Government security" as per the Government Securities Act, 2006. It also extends a similar exemption to the Bank for International Settlements.

Except where otherwise specified, the provisions take effect from April 1, 2026.