Brief Overview:
A targeted tax exemption regime for foreign investors in Indian Government securities (G‑Secs) has now been notified. This encompasses both interest income and capital gains.
Technical Details:
1) Who is covered:
(a) Foreign Portfolio Investors (FPIs)
(b) Bank for International Settlements
2) What is exempt:
(a) Interest income on Government securities
(b) Capital gains on transfer of such securities
3) Conditions:
(a) Any foreign investor registered as an FPI in India
(b) Subject to prescribed reporting requirements.
4) Effective Date:
Retrospective effect from 1 April 2026.
Takeaways:
1) Greater attractiveness for FPIs: The measure is expected to enhance the attractiveness of Indian G‑Secs for foreign investors. This addresses a long-standing market demand, particularly following inclusion of G-Secs in global bond indices. It is also likely to support improved market liquidity and depth through increased foreign participation.
2) Potential derivatives upside: Increased foreign participation may drive greater demand for offshore structured products and ancillary FX and interest rate hedging products.
3) Better post-tax economics: The yield differential with offshore government securities may still remain relatively narrow. Making the income tax free should improve post-tax spreads between offshore government securities and Indian G-Secs.
4) Retrospective application: Market participants may need to revisit existing positions in light of the retrospective application. Associated tax provisioning may require adjustment, including reversal of previously recognised liabilities. Notably, this is a rare instance where a retrospective tax amendment is likely to be positively received by the market.
For further details, please see:
For any queries/clarifications, please feel free to ping us and we will be happy to chat:
