EXEMPTIONS GRANTED TO FIIs AND BIS: FACILITATING FOREIGN CAPITAL INFLOW

1. Background

1.1 Over the past months, the domestic currency (‘INR’) has come under considerable pressure due to the ongoing geo-political tensions in the West. This persistent burden has resulted in widening of the import bill, particularly driven by volatile crude oil prices. 

1.2 This has led to a material depreciation of the INR compared to the US Dollar with the exchange rate falling below the unprecedented 97 mark. [1]  This steep decline has caused an environment of uncertainty among foreign investors leading to a significant withdrawal of foreign portfolio investments with estimated outflows reaching approximately INR 2.5 lakh crore.

1.3 In an attempt to soften the blow, the Government of India has introduced two major tax exemptions for overseas investors. Through an Ordinance dated 05 June 2026, the Central Government has exempted taxes on interest and capital gains arising in respect of Government Securities (‘G-Secs’) [2]  by Foreign Institutional Investors (‘FIIs’) and Bank for International Settlements (‘BIS’). 

1.4 The exemption is expected to sweeten the yield for FIIs which currently hold approximately 3.34% of the total outstanding G-secs. [3]  Furthermore, it would also encourage BIS to consider G-secs as an alternative investment avenue, thereby diversifying participation in Indian G-secs market. 

1.5 BIS is a global financial institution owned by central banks of various member countries. It serves as a forum for asset management and monetary cooperation among various central banks and international organizations. Currently, BIS does not hold any investment in Indian G-Secs. [4]

2. Exemption and Tax Treatment Under the Act

2.1 Prior to the present reform, interest and capital gains earned by FIIs in respect to G-secs were being taxed under Section 210(1) of the Income-tax Act, 2025 (‘the Act’) as follows:

2.2 By virtue of the Ordinance, with retrospective effect from 01 April 2026, interest income and capital gains earned by FIIs and BIS in respect of G-secs has been exempted from tax. The Ordinance specifies that the benefit of exemption shall be available subject to prescribed information being furnished by the concerned FII/BIS. As of date, the Central Board of Direct Taxes is yet to prescribe the details to be furnished. 

3. CMS INDUSLAW Comments

3.1 The Ordinance is a welcome step which portrays the Government’s effort to make India a more investor friendly destination offering a reduced tax burden for foreign investors in respect of G-secs. 

3.2 Considering the current holding of FIIs in G-Secs (being 3.34% of total outstanding G-Secs), this move alone may not materially help strengthen the domestic currency. However, the tax exemption will certainly encourage further investments by FIIs while its extension to BIS can facilitate entry of a long-term investor class in the G-Sec market. These measures will contribute to continuous flow of foreign capital into the country.