Income-tax (Amendment) Ordinance, 2026: Tax Exemption
Income-tax (Amendment) Ordinance, 2026: Tax Exemption Granted to Foreign Investors on Government Securities
On 5 June 2026, the Government introduced the Income-tax (Amendment) Ordinance, 2026, bringing a significant change to the taxation of investments in Indian Government Securities by certain foreign investors.
The amendment provides an income-tax exemption on both interest income and capital gains earned from specified Government Securities by eligible foreign institutional investors and certain international financial institutions. The change has been made effective retrospectively from 1 April 2026.
While the measure is expected to strengthen India’s sovereign debt market and attract additional overseas investment, it does not provide any direct tax relief to resident taxpayers or individual NRIs.
This article explains the amendment, its scope, beneficiaries, and its practical implications.
Background of the Amendment
The Ordinance amends Schedule IV of the Income-tax Act, 2025 by inserting two new exemption entries.
The newly introduced provisions exempt:
- Interest income earned from Government Securities.
- Capital gains arising from the sale, transfer, or exchange of Government Securities.
The exemption is available only to specified categories of foreign investors and is subject to compliance with prescribed reporting requirements.
Who Can Claim the Exemption?
The amendment extends the exemption to the following entities:
| Category | Eligibility |
|---|---|
| Foreign Institutional Investors (FIIs) | Eligible for exemption on interest and capital gains from Government Securities |
| Bank for International Settlements (BIS) | Eligible for exemption on interest and capital gains from Government Securities |
The exemption applies only if the prescribed information is furnished in the manner specified under the Income-tax rules.
What Income Is Exempt?
The benefit covers two major categories of income.
1. Interest Income
Interest earned on eligible Government Securities becomes exempt from income tax.
Illustration
A foreign institutional investor purchases Government Securities worth ₹100 crore and earns annual interest of ₹7 crore.
Under the amended provisions, the interest income may qualify for exemption, subject to fulfillment of prescribed conditions.
2. Capital Gains
Capital gains arising from the sale, transfer, or exchange of eligible Government Securities are also covered.
Illustration
- Purchase price of Government Security: ₹100 crore
- Sale price: ₹108 crore
Capital Gain: ₹8 crore
The capital gain may qualify for exemption under the new provisions.
Understanding Government Securities
Government Securities are debt instruments issued by the Government for borrowing purposes.
Common examples include:
- Treasury Bills (T-Bills)
- Government Bonds
- Dated Government Securities
- Sovereign Debt Instruments
- Other securities notified under the Government Securities framework
These instruments are generally considered among the safest investment options due to sovereign backing.
Why Has This Exemption Been Introduced?
The amendment appears to be aimed at strengthening India’s debt market ecosystem and encouraging international participation.
Key objectives may include:
1. Attracting Global Capital
Tax-efficient treatment can make Indian Government Securities more attractive to foreign investors.
2. Deepening the Bond Market
Greater participation by institutional investors can improve liquidity and market depth.
3. Supporting Government Borrowing Programs
Increased demand for Government Securities can potentially reduce borrowing costs over time.
4. Enhancing International Integration
The measure aligns with broader efforts to increase foreign participation in India’s debt markets.
Impact on Resident Indian Taxpayers
For most resident taxpayers, the amendment does not result in any change.
The following continue to remain taxable under normal provisions:
- Interest earned on Government Securities.
- Capital gains arising from the sale of Government Securities.
- Income from other debt investments.
Therefore, resident individuals, Hindu Undivided Families (HUFs), firms, LLPs, and domestic companies cannot claim this newly introduced exemption.
Summary for Residents
| Particulars | Position After Amendment |
|---|---|
| Interest on Government Securities | Taxable under normal provisions |
| Capital gains on Government Securities | Taxable under normal provisions |
| New exemption benefit | Not available |
Impact on Non-Resident Indians (NRIs)
The amendment does not grant any special exemption to individual NRIs.
An NRI investing directly in:
- Government Bonds
- Treasury Bills
- RBI Retail Direct instruments
- Other Government Securities
will continue to be taxed according to the applicable provisions of the Income-tax Act.
The exemption is available only to the specified institutional categories covered by the amendment and not merely because an investor qualifies as a non-resident.
Summary for NRIs
| Particulars | Position After Amendment |
|---|---|
| Interest income from Government Securities | Taxable as per applicable provisions |
| Capital gains on Government Securities | Taxable as per applicable provisions |
| Automatic exemption due to NRI status | Not available |
Indirect Impact on Taxpayers
Although there is no direct tax benefit for residents or individual NRIs, the amendment may have broader economic implications.
Potential indirect effects include:
| Possible Outcome | Expected Impact |
|---|---|
| Increased foreign investment | Higher participation in Government debt markets |
| Improved liquidity | More active trading in Government Securities |
| Lower borrowing costs | Potential reduction in Government funding costs |
| Stronger bond market | Enhanced depth and efficiency of debt markets |
These effects, if realized, would primarily influence financial markets rather than individual tax liabilities.
Key Takeaways
| Point | Summary |
|---|---|
| Amendment Introduced | Income-tax (Amendment) Ordinance, 2026 |
| Effective Date | 1 April 2026 |
| Eligible Beneficiaries | Foreign Institutional Investors and Bank for International Settlements |
| Exempt Income | Interest income and capital gains from Government Securities |
| Benefit for Resident Taxpayers | No direct benefit |
| Benefit for Individual NRIs | No direct benefit |
| Primary Objective | Encourage foreign investment in Government debt markets |
Conclusion
The Income-tax (Amendment) Ordinance, 2026 represents a targeted policy measure aimed at increasing international participation in India’s Government Securities market. By exempting specified foreign institutional investors and certain international financial institutions from tax on interest income and capital gains, the Government seeks to improve the attractiveness of Indian sovereign debt investments.
For resident taxpayers and individual NRIs, however, the amendment does not alter existing tax rules. Their taxation of interest and capital gains from Government Securities continues under the normal provisions of the Income-tax Act.
Accordingly, the amendment should be viewed primarily as a capital market and investment policy initiative rather than a taxpayer relief measure.
Also Read: “CBDT Notifies New Forms PAN CR-01 & PAN CR-02 for PAN Correction from 1 April 2026”
Also Read: FAQs and Guidance notes on Forms under Income-tax Rules, 2026
Read More: Union Budget 2026 – CA Cult
