How India's New Tax Exemptions for FPIs and BIS Could Strengthen Debt Markets and Attract Global Capital

India's financial markets are undergoing a gradual transformation as policymakers continue to implement reforms aimed at attracting international capital and strengthening market infrastructure.

One of the latest developments is the Income-tax (Amendment) Ordinance, 2026, which proposes tax exemptions on interest income and capital gains arising from Government Securities for Foreign Institutional Investors (FIIs) and the Bank for International Settlements (BIS).

The reform could have important implications for India's debt markets, foreign investment landscape, and long-term capital formation.

What Does the Ordinance Propose?

The amendment introduces new provisions that exempt eligible FIIs and BIS from taxation on:

• Interest earned from Government Securities

• Capital gains arising from sale, transfer, exchange, or redemption of Government Securities

The exemptions are subject to prescribed reporting and disclosure requirements.

Summary of the Proposed Exemption

Investor Category	Interest Income	Capital Gains
Foreign Institutional Investors (FIIs)	Exempt	Exempt
Bank for International Settlements (BIS)	Exempt	Exempt

This change is expected to improve the attractiveness of Indian Government Securities for international investors.

Why Tax Efficiency Matters

For global institutional investors, tax treatment is often a critical factor in investment allocation decisions.

When evaluating sovereign bond markets, investors typically compare:

• Expected yields

• Currency risk

• Regulatory stability

• Market liquidity

• Tax treatment

  
  

Even a relatively small tax burden can reduce post-tax returns and influence portfolio allocation decisions.

By eliminating taxes on interest income and capital gains for these categories of investors, India is reducing an important barrier to participation.

Significance of Including BIS

The inclusion of the Bank for International Settlements is particularly noteworthy.

The BIS, headquartered in Basel, Switzerland, serves as an international financial institution owned by central banks and plays a key role in global monetary cooperation.

Participation by institutions associated with central bank reserve management can enhance confidence in a country's debt market and support broader international engagement.

The move also places BIS alongside other international entities that have historically received specific tax benefits under Indian law.

Potential Benefits for India's Debt Market

1. Increased Foreign Participation

Tax exemptions can encourage higher allocations from:

• Global asset managers

• Sovereign wealth funds

• Pension funds

• Insurance companies

• Official monetary institutions

  
  

2. Improved Liquidity

A larger investor base generally contributes to better trading activity and improved market depth.

3. Stronger Market Efficiency

Increased participation can enhance price discovery and improve overall market functioning.

4. Greater Global Integration

The reform aligns with India's long-term objective of integrating its financial markets with global capital markets.

Broader Capital Market Implications

The ordinance should also be viewed in the context of India's broader financial sector reforms.

Recent years have seen significant efforts to:

• Expand foreign participation in capital markets

• Improve debt market infrastructure

• Promote Government Securities as an investment asset class

• Strengthen international financial services through GIFT IFSC

  
  

Collectively, these initiatives aim to make India a more attractive destination for global capital.

Looking Ahead

The proposed tax exemptions for FIIs and BIS represent more than a technical amendment to tax legislation. They signal India's intention to create a more investor-friendly environment, deepen its debt markets, and attract sophisticated institutional capital.

If the reforms succeed in increasing foreign participation and strengthening market liquidity, they could become an important milestone in India's journey toward becoming a more globally integrated financial market. Interested in understanding how India's evolving tax framework, GIFT City opportunities, AIFs, global fund management structures, and cross-border investments may impact your financial goals? Connect with CA Gaurav Kanudawala, Founder of GIFT CFO. +91 9726372715 | info@giftcfo.com

Explore how GIFT City and international investment structures can support your long-term wealth and business objectives.

Disclaimer

This article is intended for informational and educational purposes only and should not be considered legal, tax, accounting, investment, or financial advice. Readers should seek professional guidance before making investment decisions.