Ever since the liberalisation of the Indian economy, foreign portfolio investors (FPIs, erstwhile foreign institutional investors) have been an integral part of the Indian capital markets. FPIs are permitted to invest in a wide array of Indian securities including government securities, commonly referred as G-Secs, which are debt instruments issued and managed by the Reserve Bank of India (RBI) on behalf of the Central Government.
G-secs have a specified maturity and fixed coupon-based returns. They are generally regarded as one of the safest rupee-denominated instruments with minimal default risk which makes them attractive to long-term investors such as FPIs.
In order to deepen and enhance foreign investor participation in the Indian debt markets, over the past decade, India has liberalised the access to G-Secs through a series of relaxations such as introducing RBI’s Fully Accessible Route (FAR), removing investment limits on specified G-Secs, widening the range of securities eligible to be held under FAR, and permitting 100% non-resident Indian/ overseas citizens of India investments in FPI investing only in G-Secs.
Further, India’s inclusion in major global bond indices such as JPMorgan Government Bond Index—Emerging Markets and FTSE Emerging Markets Government Bond Index also gave a major boost to foreign investments in G-Secs.
Alongside regulatory relaxations, the taxation of G-Secs has undergone an evolution over the past two decades. Targeted incentives were available for foreign investors including FPI between 2013 and 2023, wherein concessional tax of 5% was charged on gross interest earned on G-Secs and specified corporate debt securities. Capital gains, on the other hand, were taxed between 10−15%1 depending on period of holding or could also be exempt to eligible FPIs under the relevant tax treaty with India.
The sunset of the concessional tax on interest income since June 2023, led to foreign investors being subject to a 20%1 tax on gross interest income. Subsequently since April 2025, the long-term and short-term capital gains on debt securities were taxed at 12.5% and 20% respectively. This move from concessional to significantly high tax rates increased the tax cost for FPIs and dampened the net returns on their Indian bond portfolios, thereby reducing the relative attractiveness of Indian debt for FPIs.
Liberalisation of investment and tax regime for FPIs
To attract long term foreign capital and to diversify and deepen the Indian bond market, SEBI simplified disclosure requirements for FPIs investing exclusively in G-Secs, and created a dedicated category, i.e. GS-FPI. Recently, RBI also introduced longer-tenure bonds and removed the short-term, concentration, and security-wise limits, providing greater flexibility for GS-FPIs.
Further, to incentivise investment in G-Secs from an Indian tax perspective, earlier this month, a full tax exemption has been announced by way of an Ordinance on both interest income and capital gains for FPIs investing in G-Secs with effect from 1 April 2026.
Over the past year, Indian markets witnessed consistent net outflows from FPI investments, with outflows across various securities surpassing ₹2.58 lakh crore (as on 15 June 2026) since January 2026. These outflows are driven by global monetary tightening, risk-off sentiment in the current geo-political situation, currency depreciation and relative valuations across emerging markets. However, with the introduction of the exempt tax regime and regulatory relaxations, FPIs have infused approximately ₹11,000 crore under the FAR route in the recent past.
Global index providers and large fixed-income investors typically look for tax neutrality and ease of access and settlement (ability to hold/settle debt instruments via International Central Securities Depositories (ICSD’s) like Euroclear or Clearstream). The full tax exemption on FPI income from G-Secs coupled with RBI’s regulatory relaxations are a welcome move to increase foreign participation in India’s debt markets and in achieving the above objectives which will, in turn, channel sizeable passive and active foreign inflows into G-Secs and lower the sovereign borrowing cost over time by broadening the investor base. It would also enhance liquidity, transparency and stability in the Indian debt market.
Recent changes will boost the debt market
These recent reforms aim to make India’s debt market stronger and globally competitive. By making it easier and more attractive for foreign investors to invest in G-Secs, the reforms are welcome steps to bring in more long-term international capital, improve market depth and liquidity, and enhance India’s presence in global financial markets. Overall, these reforms support the broader goal of building a robust and developed economy in line with the vision of Viksit Bharat @ 2047.
(Nehal Sampat and Vishal Khanna are Partners at Price Waterhouse & Co LLP.)
Views are personal and do not represent the stand of this publication.
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