In a significant move to attract foreign capital and bolster the Indian economy, the government has exempted Foreign Institutional Investors (FIIs) and the Bank for International Settlements (BIS) from taxes on interest income and capital gains derived from investments in government securities. This decision, announced on June 5, 2026, is encapsulated in the Income-tax (Amendment) Ordinance, 2026, which amends Schedule IV of the Income-tax Act, 2025, and is effective retrospectively from April 1, 2026. ([newindianexpress.com](https://www.newindianexpress.com/business/2026/Jun/05/govt-exempts-foreign-investors-bis-from-tax-on-government-securities-via-ordinance?utm_source=openai))
**Key Provisions of the Ordinance**
– **Tax Exemptions**: The ordinance stipulates that both interest income and capital gains from the sale, exchange, or transfer of government securities are exempt from income tax for FIIs and BIS. To benefit from this exemption, investors must provide the prescribed information to tax authorities. ([newindianexpress.com](https://www.newindianexpress.com/business/2026/Jun/05/govt-exempts-foreign-investors-bis-from-tax-on-government-securities-via-ordinance?utm_source=openai))
– **Amendments to the Income-tax Act**: The ordinance introduces two new entries—13D and 13E—to Schedule IV of the Income-tax Act. Entry 13D pertains to FIIs, while Entry 13E extends the same benefits to the BIS, the Switzerland-based international financial institution often referred to as the central bank for central banks. ([newindianexpress.com](https://www.newindianexpress.com/business/2026/Jun/05/govt-exempts-foreign-investors-bis-from-tax-on-government-securities-via-ordinance?utm_source=openai))
– **Definition Clarifications**: An explanatory note has been added to define the BIS and clarify that the term “government security” aligns with the definition under the Government Securities Act, 2006. ([newindianexpress.com](https://www.newindianexpress.com/business/2026/Jun/05/govt-exempts-foreign-investors-bis-from-tax-on-government-securities-via-ordinance?utm_source=openai))
**Rationale Behind the Exemption**
The government’s decision aims to enhance the attractiveness of Indian government bonds to foreign investors. By removing tax barriers, India seeks to deepen its integration with global debt markets and encourage greater participation from overseas institutional investors. This move is particularly timely, given the recent depreciation of the rupee and the need to attract stable, long-term foreign capital. ([business-standard.com](https://www.business-standard.com/markets/news/govt-tax-exemption-foreign-investors-fii-government-securities-rupee-outflows-126060500428_1.html?utm_source=openai))
**Implications for Foreign Investors**
– **Enhanced Returns**: The tax exemption is expected to improve post-tax returns for foreign investors, making Indian government securities more appealing compared to those in other countries. This could lead to increased foreign portfolio investments in India’s debt market. ([business-standard.com](https://www.business-standard.com/markets/news/govt-tax-exemption-foreign-investors-fii-government-securities-rupee-outflows-126060500428_1.html?utm_source=openai))
– **Simplified Compliance**: With the removal of tax obligations, foreign investors can expect a more streamlined investment process, reducing operational complexities and compliance requirements. ([newsonair.gov.in](https://newsonair.gov.in/centre-grants-tax-exemption-to-fpis-on-capital-gains-and-interest-income-from-government-securities/?utm_source=openai))
**Broader Economic Impact**
The exemption is anticipated to support the rupee by attracting foreign capital inflows, thereby mitigating external pressures on the currency. Additionally, it aligns India’s taxation regime for sovereign debt with global standards, potentially leading to its inclusion in global bond indices and further integration into international financial markets. ([business-standard.com](https://www.business-standard.com/markets/news/govt-tax-exemption-foreign-investors-fii-government-securities-rupee-outflows-126060500428_1.html?utm_source=openai))
**Conclusion**
The Income-tax (Amendment) Ordinance, 2026, marks a pivotal step in India’s efforts to attract foreign investment and strengthen its position in global financial markets. By exempting FIIs and the BIS from taxes on government securities, the government aims to create a more favorable investment climate, fostering economic growth and stability.
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