President Draupadi Murmu on Friday promulgated an ordinance to exempt interest and capital gain on government securities from income tax for Foreign Institutional Investors (FII). At the same time, Finance Ministry has announced additional measures.“It shall be deemed to have come into force on the 1st day of April 2026,” the ordinance said.It said that FII will get exemption from income tax for any interest on Government security, and any capital gains arising from the sale, exchange or transfer of such securities. Similar provision has been made for Bank for International Settlements.At present, foreign investors pay a 12.5 per cent long-term capital gains (LTCG) tax on bonds and listed shares held for more than 12 months. In addition, they also pay a 20 per cent withholding tax on interest earned on government bonds. Now, these have been done away for G Sec.According to a Finance Ministry statement, the exemption shall apply to any interest or capital gains arising to FPIs on or after April 1, 2026. This 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), it added.Taken together, “these reforms aim to reduce operational complexities, simplify market access and provide a more seamless investment experience comparable with leading international financial markets. These measures are expected to expand the investor base for Indian equities and Government Securities and encourage wider participation from global investors seeking exposure to one of the world’s fastest-growing major economies,” the statement said.More measuresThe Ministry also liberalised investment by individual Persons Resident Outside India under the Foreign Exchange Management (Non- Debt Instrument) Rules, 2019. In her budget speech for FY27, Finance Minister Nirmala Sitharaman announced that individual Persons Resident Outside India (PROI) will be permitted to invest in equity instruments of listed Indian companies through the Portfolio Investment Scheme which was hitherto available only to NRIs/OCIs; and the investment limit will be increased for an individual PROI under this scheme from 5 per cent to 10 per cent in any company, with an overall investment limit for all individual PROIs to 24 per cent, from the current 10 per cent.“To implement the same, Department of Economic Affairs (DEA) is notifying the Foreign Exchange Management (Non-Debt Instruments) (Third Amendment) Rules, 2026,” it said. This notification will facilitate a more proactive mobilisation of foreign portfolio capital by leveraging the existing onboarding systems already in place for NRI/OCI investors. “Simplified onboarding and reduced compliance requirements would further enhance ease of doing business, while attracting a broader base of relatively stable individual foreign investors,” it said while adding that this will also support greater and more stable foreign inflows into Indian equity markets.With the view to enhance participation by FPIs in G-Sec, the Government has decided to expand the list of specified securities under the Fully Accessible Route (FAR) to also include new issuances in Government securities in tenors of 15, 30 and 40 years as also Sovereign Green Bonds (SGrBs) in the tenors of FAR-eligible securities.Further, “with respect to FPI investments under General Route, it has been decided to remove the three restrictions, viz. short-term investment limit, concentration limit and the security-wise limit for investments by Foreign Portfolio Investors (FPIs) in Government securities, while retaining the overall quantitative investment limit of 6 per cent of the outstanding stock of the Central Government securities and 2 per cent of the State Government securities (SGSs). The sub-categories of investment limits, viz., ‘general’ and ‘long-term’ will also be merged into a single limit for investment in Government securities and SGSs, respectively,” the statement said.These measures will help in development of a smooth yield curve, and attract stable systematic inflow of long-term, patient foreign capital, including long-term investors such as pension funds, insurance companies, and sovereign wealth funds. This is also expected to boost foreign exchange inflows for the country,’ it concluded.Published on June 5, 2026