India has taken another step towards strengthening its position in global capital markets with the passage of the Taxation and Other Laws (Amendment) Bill, 2026, replacing the Income-tax (Amendment) Ordinance, 2026 that had been promulgated in June. While the legislation is technical in nature, its implications extend beyond tax administration. It seeks to remove specific tax frictions for eligible foreign investors, simplify the regulatory framework governing offshore investment funds and support broader efforts to deepen India’s government securities market.
The amendments come against the backdrop of heightened global financial uncertainty. Amid geopolitical tensions in West Asia and shifting international capital flows, India announced a package of measures in June 2026 to maintain investor confidence and attract foreign capital. Alongside the Reserve Bank of India’s liquidity measures including a swap facility for FCNR(B) deposits and relaxations relating to external commercial borrowings by public sector undertakings, the government introduced tax incentives aimed at foreign portfolio investors. The new legislation gives these measures statutory backing while incorporating additional amendments to the Income-tax Act, 2025.
From Temporary Ordinance to Permanent Law
The legislation primarily replaces the Income-tax (Amendment) Ordinance, 2026, which was issued on 5 June 2026 when Parliament was not in session.
Under Article 123 of the Constitution, ordinances are temporary legislative measures and must subsequently receive parliamentary approval to continue in force. The new law repeals the Ordinance while preserving its provisions and introducing additional amendments to the Income-tax Act, 2025.
The Act also makes consequential amendments to the:
- Finance Act, 2026
- Payment and Settlement Systems Act, 2007
Although these amendments collectively update multiple statutes, the most significant policy changes relate to taxation of eligible foreign investors.
Tax Relief for Investments in Government Securities
The legislation exempts specified Foreign Institutional Investors (FIIs) and the Bank for International Settlements (BIS) from income tax on:
- Interest earned from investments in Government Securities; and
- Capital gains arising from the sale, transfer or exchange of those securities.
The exemption applies to income arising on or after 1 April 2026.
Prior to these amendments, interest income from such investments generally attracted a tax of 20 percent, while short-term capital gains were taxed at 30 percent and long-term capital gains at 12.5 percent.
By removing these tax liabilities for eligible investors, the legislation increases the effective post-tax return on investments in Indian sovereign debt.
It is important to note that the exemption does not extend to all overseas investors. The benefit applies only to the categories specifically identified under the legislation and subject to the prescribed conditions.
Simplifying the Offshore Fund Regime
Beyond tax exemptions on government securities, the legislation also introduces significant changes to the compliance framework governing offshore investment funds.
Previously, offshore funds seeking tax benefits in India were required to comply with several structural conditions, including:
- maintaining a minimum of 25 investors;
- limiting any single investor’s participation interest to 10 percent;
- restricting investments exceeding 25 percent of the corpus in a single entity;
- avoiding investments in associate entities; and
- maintaining a minimum monthly average corpus of ₹100 crore.
The amended law removes these eligibility conditions for qualifying offshore funds.
The objective is not to alter prudential oversight but to simplify the tax framework by eliminating structural requirements that could discourage international fund participation.
Understanding the Broader Policy Context
The amendments did not emerge in isolation.
In June 2026, amid heightened geopolitical tensions in West Asia and increased volatility in global financial markets, the Government of India and the Reserve Bank of India announced a coordinated package of measures aimed at maintaining financial stability and supporting foreign capital inflows.
These includes RBI’s FCNR(B) swap facility; additional flexibility for external commercial borrowings by public sector undertakings; and tax exemptions for specified foreign investors in government securities.
The present legislation provides statutory backing to the tax-related components of that broader policy package.
Why Government Securities Matter
Government securities occupy a central position in every financial system.
They serve as benchmark instruments for interest rate discovery, liquidity management, collateral arrangements and institutional investment. They also play a critical role in government borrowing programmes and monetary policy transmission.
For global investors, sovereign debt markets are assessed not only on yield but also on taxation, market liquidity, legal certainty, settlement efficiency and currency risk.
Removing tax on interest income and capital gains for specified foreign investors improves one element of that overall investment framework.
Whether this results in materially higher foreign participation will depend on several additional variables, including global interest rate differentials, exchange rate expectations, sovereign risk perceptions and broader market conditions.
A Risk Management Perspective
From a risk management standpoint, the legislation is noteworthy because it addresses an element of policy and regulatory risk rather than market risk.
Institutional investors routinely evaluate sovereign debt markets across multiple dimensions including taxation, regulatory certainty, legal enforceability, market liquidity, settlement infrastructure, currency volatility and geopolitical developments.
Frequent or uncertain changes in taxation can increase policy risk by making future investment returns less predictable.
By replacing a temporary Ordinance with a permanent parliamentary enactment, the legislation provides greater legal certainty for eligible investors. While it does not eliminate market risks such as interest rate movements or exchange rate fluctuations, it reduces uncertainty surrounding the tax treatment of qualifying investments.
For treasury professionals and institutional investors, greater predictability in the tax regime supports more reliable portfolio modelling, valuation and long-term investment planning.
At the same time, the amendments should not be interpreted as eliminating investment risk. Foreign investors remain exposed to changes in bond yields, currency movements, liquidity conditions and evolving global macroeconomic dynamics.
Consequential Amendments
The legislation also introduces consequential amendments to the Finance Act, 2026, ensuring consistency across India’s tax framework.
Similarly, amendments to the Payment and Settlement Systems Act, 2007 align the legal framework with the broader package of financial sector measures. These changes are largely technical and are not intended to introduce substantive changes to India’s payment ecosystem.
Looking Beyond Taxation
Viewed in its entirety, the Taxation and Other Laws (Amendment) Act, 2026 is less about granting tax concessions and more about refining the institutional framework governing foreign participation in India’s sovereign debt market.
By providing tax certainty for specified foreign investors, simplifying compliance requirements for eligible offshore funds and replacing temporary executive action with parliamentary legislation, the Act seeks to remove selected policy frictions that can influence cross-border investment decisions.
The legislation also highlights a broader trend in financial policymaking: regulatory certainty has become an increasingly important factor in market confidence. As capital becomes more mobile and investment decisions are shaped by a combination of fiscal policy, legal clarity and macroeconomic stability, targeted legislative reforms such as these assume significance not merely as tax measures, but as components of the broader financial market architecture.
