In a significant push to attract long-term foreign capital and deepen India's financial markets, the Union government on Friday announced a series of reforms that will make it easier for overseas investors to invest in Indian equities and government securities. The government has also granted a complete tax exemption on interest income and capital gains earned by eligible foreign investors from investments in government bonds.
The reforms include liberalising investment norms for individual persons resident outside India (PROIs), easing restrictions on foreign portfolio investors (FPIs) investing in government securities, expanding the scope of securities eligible under the Fully Accessible Route (FAR), and exempting foreign investors from taxes on interest income and capital gains arising from investments in government securities.
Announced by the ministry of finance (MoF), the measures are aimed at strengthening India's position as a leading global investment destination, broadening the investor base in domestic capital markets and attracting stable foreign capital flows.
The government said the reforms build on recent efforts to improve the ease of doing business in India's capital markets and are intended to make foreign investment in equities and sovereign debt more accessible, efficient and globally competitive.
A key announcement concerns overseas individuals investing in Indian-listed companies through the portfolio investment scheme (PIS). Until now, the facility was largely available only to non-resident Indians (NRIs) and overseas citizens of India (OCIs).
As announced in the Union Budget for FY26-27, individual PROIs will now be permitted to invest in equity instruments of listed Indian companies through the scheme. The investment ceiling for an individual PROI has also been doubled to 10% per company from the existing 5%.
Further, the aggregate limit for all individual PROIs investing in a company has been increased to 24% from the current 10%.
To operationalise these changes, the department of economic affairs (DEA) will notify the Foreign Exchange Management (Non-Debt Instruments) (Third Amendment) Rules, 2026.
According to the finance ministry, the move will leverage existing onboarding systems already available for NRI and OCI investors, simplify compliance requirements and encourage a broader base of relatively stable foreign investors to participate in Indian equity markets.
The government has also unveiled a major overhaul of the regulatory framework governing FPI investments in government securities.
Under the revised framework, the list of securities eligible under the FAR will be expanded to include new issuances of government securities with maturities of 15, 30 and 40 years. Sovereign green bonds issued in eligible FAR tenors will also be included.
The FAR allows non-resident investors unrestricted access to specified government securities without being subject to investment ceilings.
In another significant step, the government has removed three long-standing restrictions applicable to FPI investments in government securities under the general route: the short-term investment limit, concentration limit and security-wise investment limit.
However, the overall quantitative cap on foreign investment will remain unchanged. FPIs will continue to be permitted to hold up to 6% of the outstanding stock of central government securities and 2% of state government securities (SGSs).
The government has also merged the existing 'general' and 'long-term' investment categories into a single investment limit for central government securities and SGSs.
Officials said the changes are expected to facilitate the development of a smoother sovereign yield curve and attract larger inflows from long-term institutional investors such as pension funds, insurance companies and sovereign wealth funds.
The most consequential measure for global investors may be the government's decision to exempt FPIs from income tax on both interest income and capital gains arising from investments in government securities.
The tax relief has been introduced through the Income-tax (Amendment) Ordinance, 2026, promulgated on 5 June 2026. The exemption takes effect retrospectively from 1 April 2026.
Under the new framework, FPIs and foreign institutional investors (FIIs) will no longer be required to pay long-term capital gains tax (LTCG) on listed government securities held for more than one year. Previously, such gains were subject to a 12.5% tax.
The government has also eliminated the withholding tax on interest income earned from government securities. Earlier, such interest income generally attracted a 20% withholding tax unless reduced under an applicable tax treaty.
As a result, eligible foreign investors will now enjoy a complete exemption from tax on both interest earnings and gains arising from the sale, transfer or exchange of government securities from 1 April 2026.
The tax exemption has also been extended to the Switzerland-based Bank for International Settlements (BIS), often referred to as the "central bank for central banks".
Investors seeking the tax benefit will be required to comply with prescribed reporting and disclosure requirements.
Market participants have long argued that India's tax treatment of sovereign debt made government securities less attractive than those offered by several competing emerging-market economies.
By eliminating taxes on both interest income and capital gains, policymakers hope to improve the competitiveness of Indian government bonds in global portfolios, encourage greater foreign participation and support deeper liquidity in the domestic debt market.
The government said the combined impact of the reforms would reduce operational complexity, simplify market access and offer an investment experience more comparable with that of leading international financial centres.
The measures are expected to expand the investor base for both equities and government securities while helping channel long-term foreign capital into one of the world's fastest-growing major economies.
The ordinance has come into force with immediate effect because Parliament is not currently in session. However, like all ordinances, it will require parliamentary approval to remain in force beyond the constitutionally prescribed period.
