On June 5, the Central government released the Income-tax (Amendment) Ordinance 2026, which exempts foreign investors from paying taxes on capital gains and interest income received from government assets.
The benefit is applicable retroactively from the start of the current tax year because the ordinance went into force on April 1, 2026.
President Droupadi Murmu's Income-tax (Amendment) Ordinance, 2026 adds new types of excluded income associated with government bond investments to Schedule IV of the Income-tax Act, 2025.
The President was convinced that "circumstances exist which render it necessary... to take immediate action," hence the ordinance was issued while Parliament was not in session.The Bank for International Settlements (BIS), a Swiss-based organization that acts as a forum for international central banks, is also granted the same exemption through a distinct entry, provided that it provides information in a specific format and manner.
According to the ordinance, interest income and capital gains from the sale, exchange, or transfer of government assets are both exempt. Additionally, it defines "government security" by referring to the language found in the Government Securities Act of 2006.

All taxes were eliminated
For government bonds held for longer than a year, FIIs were required to pay 12.5 percent long-term capital gains tax (LTCG). If the bond is held for less than a year, the short-term capital gains tax rate was twenty percent. These two taxes have been eliminated.
Additionally, international investors' interest income from government securities is no longer subject to the withholding tax.
In an effort to maintain the rupee and slow the growth of the current account deficit, these actions have been announced in an effort to increase foreign capital inflows and reduce outflows.
Additionally, the finance ministry stated that the exemption is intended to streamline the tax system for qualified foreign investors and facilitate investment in government assets.

Since the war with Iran began on February 28, the rupee has lost about 5% of its value relative to the US currency. After closing the previous session at 95.27, the rupee was trading at 95.45 against the dollar on June 3.
Additionally, foreign investors' interest income from government bonds was subject to a 20% withholding tax (a tax withheld at the source). The tax on revenue from government securities, state development loans, and bonds denominated in rupees was five percent until July 1, 2023.In order to stop the rupee's depreciation during the so-called taper tantrum, the 5 percent tax rate was first implemented in 2013. "The tax rate remained unchanged for more than ten years, despite the fact that it was supposed to be a temporary solution. In order to maintain parity with the rates on capital gains, the government decided to raise the tax rate (on interest income from debt securities) to 20% in 2023, according to an earlier statement by an official.