FII Secures IT Exemption on Interest and Capital Gains for Government Securities
President Draupadi Murmu has promulgated an ordinance exempting Foreign Institutional Investors (FII) from income tax on interest and capital gains from government securities. This ordinance, effective from April 1, 2026, also extends similar provisions to the Bank for International Settlements, thereby eliminating the existing long-term capital gains tax of 12.5% on bonds and shares held for over 12 months, as well as the 20% withholding tax on interest earned on government bonds. The Finance Ministry has highlighted that these reforms aim to simplify market access, reduce operational complexities, and provide a more attractive investment environment, particularly for long-term investors like pension funds, insurance companies, and sovereign wealth funds (SWFs).
For the common citizen and the market, this exemption is likely to create a more favorable investment climate by encouraging greater foreign participation in Indian government securities and equities. Reduced taxation on foreign investments could lead to an influx of long-term capital, which may stabilize the financial markets and potentially lower interest rates over time. This would also contribute to the overall liquidity in the system, benefiting domestic investors and consumers. Moreover, the broader participation from foreign investors can enhance market depth, reliability, and responsiveness, which are advantageous for the local economy.
Looking ahead, the government and the Reserve Bank of India (RBI) are expected to take additional steps to bolster this initiative further. The recent reforms indicate a strategic move towards enhancing India’s position in the global financial ecosystem by attracting stable foreign capital. Future measures may include continued liberalization under the Foreign Exchange Management Act (FEMA) and the promotion of new financial instruments such as Sovereign Green Bonds. Overall, these initiatives are projected to develop a smoother yield curve, stabilize foreign exchange inflows, and align India with leading international financial markets, thereby fostering long-term economic growth.
Source: The Hindu
(Expert Note: This report was independently prepared by the Wealthova Economy team.)