India: Capital Gains Tax Regulatory changes relevant for FPIs
8 June 2026
Operational Tax News
At a glance
The Government of India and the Reserve Bank of India ("RBI") have announced key tax and regulatory measures aimed at enhancing the attractiveness of Indian Government securities for foreign investors.
The Government has introduced a complete tax exemption for Foreign Portfolio Investors ( "FPIs") and the Bank for International Settlements ("BIS") in respect of income earned from Government securities. The amendment has been made effective from April 1, 2026.
Interest income earned and capital gains arising on the transfer, sale or redemption of Government securities shall be exempt from Indian income tax.
On top of that, the Reserve Bank of India (“RBI”) has announced a series of regulatory reforms aimed at enhancing the participation of FPIs in the Government securities market.
A closer look
Indian Capital Gains Tax Regulatory changes relevant for FPIs
In a significant boost to foreign portfolio investments in the Indian sovereign debt market, the Government of India and the Reserve Bank of India ("RBI") have announced key tax and regulatory measures aimed at enhancing the attractiveness of Indian Government securities for foreign investors.
The Government has introduced a complete tax exemption for Foreign Portfolio Investors ( "FPIs") and the Bank for International Settlements ("BIS") in respect of income earned from Government securities, subject to the furnishing of prescribed information in the form and manner to be notified by the Government. The amendment has been made effective from April 1, 2026. The amendment is intended to be permanent unless the Parliament does not approve the same once it comes in session, which is highly unlikely.
The following income shall be exempt from Indian income tax:
- Interest income earned from Government securities; and
- Capital gains arising on the transfer, sale or redemption of Government securities.
For ease of reference, the tax position for FPIs before and after the Ordinance is summarized below:
|
Income Type |
Holding Period |
Current tax position under Indian Income tax law |
Revised tax position with effect from April 1, 2026 as per Ordinance |
|
Interest on Government securities |
Not applicable |
Taxable at 20% (plus applicable surcharge and cess), subject to treaty relief where applicable |
Exempt |
|
Short term Capital Gains – On listed/unlisted Government securities |
≤ 12 months for listed; ≤ 24 months for Unlisted |
Taxable at 30% (plus applicable surcharge and cess), subject to treaty relief where applicable |
Exempt |
|
Long term Capital Gains – On listed/unlisted Government securities |
> 12 months for listed; > 24 months for Unlisted |
Taxable at 12.5% (plus applicable surcharge and cess), subject to treaty relief where applicable |
Exempt |
On top of the above, the Reserve Bank of India ("RBI") has announced a series of regulatory reforms aimed at enhancing the participation of Foreign Portfolio Investors (FPIs) in the Government securities market and improving ease of investment for individual Persons Resident Outside India ("PROIs") in the equity segment.
Key announcements:
1. List of eligible securities under FAR expanded
The list of securities under the Fully Accessible Route ("FAR") for FPIs has been expanded to include all new issuances of 15-year, 30-year and 40-year Government securities, as well as Sovereign Green Bonds issued in the tenors of FAR-eligible securities.
2. Removal of key investment limits under the General Route
The RBI has announced removal of following limits applicable for FPI investments in Government securities under the General Route:
(i) Short-term investment limit;
(ii) Security-wise limit; and
(iii) Concentration limit;
A summary of above limits applicable now vis-à-vis changes announced by the RBI is given below:
Restriction |
Earlier Position |
Revised Position |
Short-term investment limit |
Investments in Government securities with residual maturity of up to one year could not exceed 30% of an FPI's total investment in Government securities |
Removed |
Security-wise limit |
Aggregate FPI holdings in any Central Government security could not exceed 30% of the outstanding stock of that security |
Removed |
Concentration limit |
Investments by an FPI (including related FPIs) could not exceed 15% of the prevailing investment limit in the case of long-term FPIs and 10% for other FPIs |
Removed |
Investment categories |
Separate "General" and "Long-Term" investment categories |
Merged into a single investment limit |
Overall FPI investment limits |
6% of outstanding Central Government securities and 2% of outstanding State Government securities |
No change |
3. Notification to facilitate investment by individual PROI under Portfolio Investment Scheme (“PIS”)
The RBI has also announced that the Department of Economic Affairs will notify Foreign Exchange Management (Non-Debt Instruments) (Third Amendment) Rules, 2026 to operationalize the PIS reforms proposed in the Union Budget 2026-27. The notification will extend the eligibility of investment in listed equities of Indian companies through PIS framework to all individual PROIs, including foreign citizens, and increase the individual and aggregate investment limits from 5% to 10% and 10% to 24%, respectively.
Accordingly, foreign citizens can now invest directly in Indian listed securities, mutual funds etc. under the PIS route without registering themselves as FPIs through a custodian bank. This will provide a simpler route for global individual investors though such investors will need to obtain an Indian tax ID (PAN) and file annual tax returns in India.
Key Takeaways
The combined impact of the tax exemption introduced as well as the above RBI announcement is expected to potentially increase foreign participation in India's financial market (particularly sovereign debt market).
For FPIs investing in Government securities, the exemption of both interest income and capital gains from Indian taxation has the potential to materially improve post-tax returns. Coupled with the expansion of the FAR framework and the proposed removal of key investment restrictions under the General Route, these measures are expected to enhance investment flexibility, improve market accessibility and further strengthen the attractiveness of Indian Government securities for foreign investors. Further, the operationalization of PIS reforms is also expected to broaden the overseas investor base and facilitate greater participation by individual foreign investors in Indian equity markets.
FPIs that have already paid Indian taxes on interest income or capital gains arising from Government securities during Tax Year 2026-27 may note that any taxes already paid can be utilized to offset future Indian tax liabilities arising from trades undertaken or income earned up to 31 March 2027 (being the end of the Indian tax year). To the extent any such taxes remain unutilized as of 31 March 2027, the balance may be claimed as a refund while filing the annual Indian income-tax return for the relevant year.
How Deloitte can help?
To benefit from this new Indian Capital gain tax exemption as soon as possible we can help you to analyse your portfolio in respect to eligible securities and to determine the next steps.
