- The Lok Sabha has passed the Taxation and Other Laws Amendment Bill, which provides tax exemption to Foreign Institutional Investors (FIIs) on interest and capital gains from government securities.
- This legislation gives legislative backing to a tax relief that was earlier introduced via the Income-tax (Amendment) Ordinance, 2026, and repeals that ordinance.
- The exemption applies to income arising on or after April 1, 2026, and is conditional on FIIs furnishing information in the form and manner prescribed by the government.
- Before the change, interest income from government securities was taxable at 20 per cent for FIIs, while short-term capital gains were generally taxed at 30 per cent and long-term capital gains at 12.5 per cent.
- The Ministry stated that the move aims to align India's tax treatment with comparable jurisdictions and attract stable and long-term foreign capital, including from pension funds, insurance companies, and sovereign wealth funds.
- The legislation is classified as a Money Bill, limiting the Rajya Sabha's role to recommendations, which the Lok Sabha can accept or reject.
The Lok Sabha's recent passage of the Taxation and Other Laws (Amendment) Bill, 2026, marks a significant shift in India's tax policy for foreign investors. The bill exempts Foreign Institutional Investors (FIIs) from income tax on interest and capital gains from government securities, a move aimed at enhancing the attractiveness of India's bond market.
Previously, interest income from government securities was taxed at 20% for FIIs, with short-term capital gains taxed at 30% and long-term capital gains at 12.5%. The new legislation, effective from April 1, 2026, aligns India's tax treatment with global standards, potentially drawing in pension funds, insurance companies, and sovereign wealth funds.
The Finance Ministry stated that this reform is designed to broaden the investor base and deepen the government securities market, thereby attracting stable and long-term foreign capital. The bill also repeals the Income-tax (Amendment) Ordinance, 2026, while ensuring that actions taken under the ordinance are recognized under the new law.
As a Money Bill, the legislation limits the Rajya Sabha's role to recommendations, which the Lok Sabha can accept or reject, ensuring a streamlined legislative process. The bill also extends similar exemptions to the Bank for International Settlements regarding government securities.
“The exemption, effective for income from April 1, 2026, covers FIIs and the Bank for International Settlements, subject to prescribed information. As a Money Bill, the Rajya Sabha can only recommend changes, which the Lok Sabha may accept or reject.”
