No LTCG tax on FIIs’ govt. bond investments

1. At a Glance

Income-tax (Amendment) Ordinance, 2026 exempts Foreign Portfolio Investors (FPIs)/FIIs from tax on interest income and capital gains (both LTCG and STCG) arising from Government Securities (G-Secs) [S1][S2].
Removes the earlier 12.5% LTCG levy on FPI/FII gains from sale/transfer/redemption of G-Secs held over 12 months [S3].
Aims to deepen India's G-Sec market and attract foreign debt capital amid heavy FII outflows [S4].
UPSC relevance: tests intersection of taxation policy, capital markets, ordinance-making power (Art. 123), and FDI/FPI distinction — a recurring GS-III economy theme.

GoI promulgated an ordinance waiving the 12.5% LTCG tax on FII investments in government bonds; exemption effective April 1, 2026 [S4].
Comes amid FIIs selling ₹2.5 lakh crore worth of Indian securities (as per NSDL data) [S4].
Union Cabinet, chaired by PM Narendra Modi, approved the ordinance to amend the Income Tax Act [S2].

Prior regime: FPI/FII income from G-Secs taxed as — interest income at 20%, STCG at 30%, LTCG at 12.5% [S1].
The move follows earlier reforms to expand foreign participation in G-Secs, including India's inclusion in global bond indices (JPMorgan GBI-EM, Bloomberg EM index) that had already boosted FPI debt inflows [S2].
Government had separately announced measures to deepen the G-Sec market and facilitate greater FPI participation in the equity segment [S2].
Current step: Income-tax (Amendment) Ordinance, 2026, inserting specific provisions exempting FIIs investing in G-Secs from income tax on interest/capital gains [S1].

Item	Detail
Instrument	Income-tax (Amendment) Ordinance, 2026 [S1]
Nodal authority	Union Cabinet / Ministry of Finance (CBDT administers) [S2][S1]
Exemption scope	Interest income + capital gains (LTCG & STCG) on FPI/FII investment in Government Securities (G-Secs) [S1]
Pre-ordinance LTCG rate	12.5% [S3]
Pre-ordinance interest tax	20% [S1]
Pre-ordinance STCG rate	30% [S1]
Effective date	Income arising on/after April 1, 2026 [S4][S3]
Trigger context	FIIs sold ₹2.5 lakh crore of Indian securities per NSDL data [S4]
Stated rationale	"Recognising the importance of a competitive tax regime in attracting global capital... rationalise tax treatment on investments by FPIs in Government Securities" [S4]

Economic: Reduces cost of capital for the Centre by making G-Secs more attractive to overseas debt investors; aligns India with comparable jurisdictions with no/low capital gains tax on sovereign debt [S1][S3]. Experts note it addresses debt-market appeal but not necessarily equity FPI caution (currency risk, valuation premium remain unaddressed) [S4].
Legal/Constitutional: Enacted via ordinance route (Art. 123 — Presidential ordinance-making power on Cabinet's advice), bypassing immediate parliamentary passage; amends the Income Tax Act [S2][S1].
Governance/Fiscal: Represents a targeted tax expenditure — forgoing revenue from FII bond gains to shore up capital inflows and rupee stability.
Geopolitical/Strategic: Part of broader effort to position India as an attractive emerging-market debt destination, reinforcing gains from global bond index inclusion.
Administrative: CBDT issued FAQs clarifying scope of the exemption for FIIs [S1].

June 2026: Ordinance promulgated waiving 12.5% LTCG tax on FII G-Sec investments; CBDT released FAQs on the exemption [S1][S4].
2026: PIB release "Reforms to Expand Foreign Participation in G-Secs" detailing the tax rationalisation decision [S2].
Related: earlier PIB release on measures to deepen G-Sec market and boost FPI participation in equities [S2].
FII net selling of ₹2.5 lakh crore in Indian securities reported via NSDL data, forming the immediate backdrop [S4].

The ordinance exempting FIIs from LTCG on G-Secs is the Income-tax (Amendment) Ordinance, 2026 [S1].
Pre-exemption LTCG rate on FPI G-Sec gains was 12.5% [S3].
Pre-exemption interest income tax rate for FIIs on G-Secs was 20%; STCG was 30% [S1].
Exemption applies to income arising on or after April 1, 2026 [S4][S3].
The exemption covers both interest income and capital gains (not capital gains alone) [S1].
FIIs sold ₹2.5 lakh crore of Indian securities per NSDL data around the time of the announcement [S4].
CBDT (Central Board of Direct Taxes) issued FAQs clarifying the exemption [S1].
The measure is distinct from equity-segment FPI reforms — it targets only Government Securities (debt), not equities [S2][S4].
Ordinances are issued under Article 123 of the Constitution when Parliament is not in session, on the recommendation of the Union Cabinet.

GS-III: Indian Economy — mobilisation of resources, government budgeting, capital markets, foreign capital inflows.
GS-II: Polity — ordinance-making power (Art. 123), its use for fiscal/tax reforms.
Possible question stems: 1. "Discuss the rationale and likely economic impact of exempting FPI investments in government securities from capital gains tax." (GS-III) 2. "Examine the constitutional propriety and limits of using the ordinance route for tax policy changes." (GS-II) 3. "Distinguish between debt-market and equity-market FPI concerns in India, with reference to recent tax reforms." (GS-III)

FPI vs FDI — conceptual distinction tested frequently in Prelims.
JPMorgan GBI-EM / Bloomberg Emerging Market bond index inclusion — the earlier reform that boosted FPI G-Sec inflows.
Article 123 (Ordinance-making power) — constitutional basis for such fiscal reforms.
Capital Gains Tax regime, Budget 2024-25 changes — for comparative rate structure.
Balance of Payments & Current Account — how FII flows affect the rupee and external stability.
RBI's Fully Accessible Route (FAR) for G-Secs — related debt-market liberalisation mechanism.
SEBI's FPI regulatory framework — registration and operational categories of FPIs.

Confusing this G-Sec-specific exemption with a general FPI/equity capital gains relief — the reform does NOT cover equity investments [S4].
Assuming the exemption covers only capital gains — it also covers interest income [S1].
Mixing up the effective date (April 1, 2026) with the date of promulgation (around June 2026).
Misattributing the reform to SEBI or RBI instead of the Ministry of Finance/CBDT and Union Cabinet.
Confusing this ordinance with the Taxation and Other Laws (Relaxation of Certain Provisions) Ordinance, 2020, an unrelated COVID-era compliance-relief measure.

[S1] FREQUENTLY ASKED QUESTIONS (FAQs) ON FIIs EXEMPTION — https://static.pib.gov.in/WriteReadData/specificdocs/documents/2026/jun/doc202665884001.pdf — (tier: 1)
[S2] Reforms to Expand Foreign Participation in G-Secs — https://www.pib.gov.in/PressReleasePage.aspx?PRID=2269719&reg=3&lang=1 — (tier: 1)
[S3] India eliminates capital gains tax on FII bond investments — https://www.privatebankerinternational.com/news/india-eliminates-capital-gains-tax/ — (tier: 4)
[S4] Today's Paper — No LTCG tax on FIIs' govt. bond investments, The Hindu Business Line — https://www.thehindu.com/todays-paper/2026-06-06/th_international/articleGQ2G2T1O6-14847479.ece — (tier: 4)