India has announced major reforms to attract more foreign investment into Government Securities (G Secs), deepen the bond market, and strengthen the country’s debt market. The goal is to attract stable long term capital, improve liquidity, reduce borrowing costs, and support infrastructure, manufacturing, urban development, and climate projects.
A key reform is a new tax exemption for Foreign Institutional Investors (FIIs) and Foreign Portfolio Investors (FPIs) investing in G Secs. The changes were introduced through the Income Tax (Amendment) Ordinance, 2026 and apply to income earned from April 1, 2026.
Earlier, foreign investors paid 20% tax on interest income from G Secs, up to 30% tax on short term capital gains (STCG), and 12.5% tax on long term capital gains (LTCG).
Under the new regime, tax on interest income, STCG, and LTCG from Government Securities has been reduced to NIL. The exemption covers gains from sale, transfer, exchange, and redemption of G Secs.
Long term capital gains on listed G Secs apply after 12 months, while unlisted G Secs require a holding period of more than 24 months. Short term capital gains apply up to 12 months for listed securities and up to 24 months for unlisted securities.
As of May 12, 2026, FPIs held Government Securities worth Rs 3,75,171 crore. This represented 3.34% of India’s total outstanding G Sec stock of Rs 112.42 lakh crore.
Under the Fully Accessible Route (FAR), foreign investors held Rs 3,21,080 crore of G Secs. This represented 6.74% of the Rs 47.63 lakh crore outstanding stock eligible under FAR.
Under the General Route, FPI holdings stood at Rs 54,091 crore against an outstanding stock of Rs 64.78 lakh crore, representing a share of 0.83%.
The government has expanded FAR to include new issuances of 15 year, 30 year, and 40 year Government Securities. Sovereign Green Bonds (SGrBs) issued in FAR eligible tenors will also be included.
To encourage greater participation, the government has removed the short term investment limit, concentration limit, and security wise investment limit under the General Route.
However, overall investment caps remain unchanged at 6% of the outstanding stock of Central Government Securities and 2% of the outstanding stock of State Government Securities (SGSs).
The government will also merge the existing General and Long Term FPI categories into a single investment limit framework for Government Securities and State Government Securities.
Officials expect these reforms to attract pension funds, insurance companies, sovereign wealth funds, and other global institutional investors, helping increase foreign capital inflows and further integrate India’s bond market with global financial markets.
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