The President of India has promulgated the Income-tax (Amendment) Ordinance, 2026 (No. 2 of 2026). Published in an extraordinary edition of the Gazette of India today by the Ministry of Law and Justice, the legislative intervention introduces sweeping tax exemptions on interest income and capital gains realized by Foreign Institutional Investors (FIIs) and the Bank for International Settlements (BIS) from investments in Government Securities (G-Secs).
The ordinance, executed under powers vested by Clause (1) of Article 123 of the Constitution, was triggered as Parliament is currently not in session and immediate executive action was deemed necessary. Crucially, the amendment to Schedule IV of the Income-tax Act, 2025 has been granted a retroactive mandate and is deemed to have come into force on April 1, 2026, capturing the start of the current financial year.
Structural Shift in Sovereign Bond Taxation
The ordinance introduces two major entries to the statutory framework under Schedule IV of the Act:
- Serial Number 13D (Foreign Institutional Investors): Exempts any interest on Government securities and any capital gains arising from the sale, exchange, or transfer of such securities.
- Serial Number 13E (Bank for International Settlements): Extends identical exemptions to the Bank for International Settlements (BIS).
The statutory notes explicitly clarify the definition of the BIS as the historic global financial institution established at the Hague Conference in 1930 and headquartered in Basel, Switzerland.
Transparency and Regulatory Compliance
While the move dramatically cuts down the tax dragnet for cross-border institutional capital, it comes with explicit regulatory riders. The ordinance specifies that the exemptions shall be strictly “subject to furnishing of information in such form and manner, as may be prescribed”. This ensures that while capital entry is financially incentivized, the government retains absolute oversight and transactional transparency regarding institutional beneficiaries.
Market analysts view this dynamic tax shift as a strategic move to optimize India’s positioning on global bond indices, making domestic sovereign debt significantly more lucrative to international central banks and elite asset managers. The Central Board of Direct Taxes (CBDT) is expected to roll out the operational guidelines and structural reporting templates for foreign investors shortly.
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