India exempts FPI interest and capital gains on Government securities from income tax
FPI custodians, fund administrators and tax functions must treat interest and capital gains on Indian Government securities as income-tax exempt for amounts arising on or after 1 April 2026, changing withholding and investor tax reporting.
Change
India exempted interest and capital gains earned by Foreign Portfolio Investors on Government securities from income tax, with effect from 1 April 2026, and provided the same exemption to the Bank for International Settlements.
Why it matters
The Government has exempted interest and capital gains arising to Foreign Portfolio Investors on Government-securities investments from income tax, applicable to amounts arising on or after 1 April 2026, with a parallel exemption for the Bank for International Settlements. The change removes taxable income for FPIs on G-Secs, requiring custodians, paying agents and fund administrators to reflect zero income-tax treatment in withholding, investor tax reporting and fund accounting for the affected income. The measure is part of a wider Ministry of Finance reform package covering FEMA Non-Debt-Instrument rule changes for individual non-resident investors and a revised FPI framework for Government securities.
Implications
- — Custodian banks and paying agents for FPIs must cease applying income-tax withholding on interest and capital gains from Government-securities payments arising on or after 1 April 2026, and reconcile treatment for affected client income.
- — FPI fund administrators and tax functions must treat G-Sec interest and capital gains as income-tax exempt for amounts arising on or after 1 April 2026 when calculating and reporting investor returns and tax positions.
- — FPIs and their advisers must reassess after-tax return assumptions and any prior tax provisioning on Government-securities holdings to reflect the exemption for income arising on or after 1 April 2026.
Who is affected
- — Custodian banks and paying agents for FPIs holding Indian Government securities
- — FPI fund administrators and tax functions
- — Foreign Portfolio Investors and their tax advisers