Govt notifies tax exemption for FIIs on G-Sec interest and capital gains; details here

The Ministry of Law and Justice has notified the Income Tax (Amendment) Ordinance 2026. The amendment provides tax exemption to Foreign Institutional Investors (FIIs) on interest from Government security (G-sec) and capital gains arising from their sale. Similar benefits have also been extended to the Bank for International Settlements (BIS) through this ordinance.

The amendment is effective from April 1, 2026.

The tax exemption will apply to interest earned on government securities and capital gains arising from their sale or transfer by FIIs and BIS.

With the notification of the ordinance, the government has removed 12.5% long-term capital gains tax (LTCG) and 20% withholding tax on interest for eligible investors.

However, the benefit announced through this ordinance will be subject to prescribed reporting requirements.

As per Section 201 (6)(a) of the Income-tax Act 2025, the G-sec incomes of FIIs were taxed as below:

• Interest income from G-sec: 20% tax

• STCG from G-secs not covered under Section 196 of the Act: 30% tax

• LTCG from G-Secs not covered under Section 198 of the Act: 12.5% tax

• LTCG covered under Section 198 of the Act: 12.5% above ₹1,25,000.

However, the amendment introduced through the latest ordinance has removed the above taxes.

According to the Ministry of Finance, the tax relief for FIIs will "ensure stable systematic inflow of durable, patient foreign capital and long-term investors such as pension funds, insurance companies, and Sovereign wealth funds (SWFs)."

Foreign Portfolio Investors (FPIs) registered with the Securities and Exchange Board of India (SEBI) are considered as FIIs.FIIs/FPIs are allowed to invest in Government Securities through the General Route and the Fully Accessible Route (FAR).

Most of the actively traded Central Government securities are listed. However, transactions in Government securities do not attract Securities Transaction Tax (STT), according to the ministry.

As of May 12, 2026, FPIs held G-secs worth ₹3,75,171 crore through both FAR and general route.