[Analysis] G-Sec Tax Exemption for FIIs under ITA 2025 – Conditions and Scope

G-Sec tax exemption for FIIs marks a significant change under the Income-tax Act, 2025, as interest and capital gains from government securities are now exempt for eligible Foreign Institutional Investors and the Bank for International Settlements. This blog explains the scope of the exemption, covered income, applicable conditions, and its impact on TDS and the earlier tax regime.

Table of Contents

1. Existing Tax Treatment
2. Amendment by the Ordinance
3. Comparison of Earlier and Amended Tax Regime

Section 11, read with Schedule IV, of the Income-tax Act, 2025 (ITA 2025), provides an exclusive list of income that does not form part of the total income of a non-resident or a foreign company. The Income-tax (Amendment) Ordinance 2026 inserts two new entries, 13D and 13E, into Schedule IV with effect from 01-04-2026.

Entry No. 13D provides the exemption for the interest on government securities (G-Sec) and capital gains from the sale, exchange or transfer of such securities to the Foreign Institutional Investors (FIIs). Entry 13E extends a similar exemption to the Bank for International Settlements (BIS).

1. Existing Tax Treatment

The pre-amended ITA 2025 (or the repealed ITA 1961) did not provide any exemption to FIIs for interest income and capital gains arising from G-Secs. Such income was taxed under a special regime contained in Section 210 of the ITA 2025 (corresponding to Section 115AD of the ITA 1961).

This provision prescribed special tax rates on the income from ‘securities’, and on capital gains arising from the transfer of such securities to FPIs and specified funds. The term ‘securities’ takes its meaning from Section 2(h) of the Securities Contracts (Regulation) Act, 1956, which expressly includes Government securities along with shares, bonds, debentures and derivatives.

The rates under this regime in respect of G-Secs were as follows:

• Interest income earned by an FPI on securities is taxable at a concessional rate of 20%, subject to any more beneficial treatment under the applicable tax treaty.
• Long-term capital gains are taxable at 12.5%, while short-term capital gains are taxable at 30%.

Further, the payer was required to deduct tax at source, under Section 393(2) [Table S. No. 15] of the ITA 2025 (corresponding to Section 196D of the ITA 1961), before paying any income on securities to an FPI.

Similarly, the ITA 2025 or ITA 1961 did not provide any specific exemption for the ‘Bank for International Settlements’, an institution established at the Hague Conference in 1930 and headquartered in Basel, Switzerland. It is the world’s oldest international financial institution, and the Reserve Bank of India has been a member since 1996. BIS is often called the bank for central banks because it accepts deposits from central banks and manages a portion of their foreign exchange reserves. The founding documents of the BIS contemplate tax immunity for the Bank in member countries, and most member countries grant it. However, the ITA did not contain any specific exemption for the BIS.

2. Amendment by the Ordinance

The new entries 13D and 13E provide exemptions to FIIs and BIS from any interest on G-Secs, and any capital gains arising from the sale, exchange, or transfer of such G-Secs. The impact of these insertions in Schedule IV is discussed below.

2.1 Eligible Income

The exemption is available for the following incomes:

• Interest on G-Secs
• Capital gains from the sale, exchange or transfer of G-Secs

Note 4(c) to Schedule IV defines the term “government security” for the purposes of the exemption under this schedule. It provides that “Government security” shall have the same meaning as assigned to it in section 2(f) of the Government Securities Act, 2006 (‘GSA’).

Section 2(f) of the GSA provides that the “Government security” means a security created and issued by the Government for the purpose of raising a public loan or for any other purpose and subject to such terms and conditions as may be notified by the Government in the Official Gazette. Section 2(e) of the GSA defines “Government”, in relation to any Government security, as the Central or State Government that issues the security.

2.1.1 Types of G-Secs

The G-Secs issued by the Central Government, State Government and Local Authorities can be classified into the following:

• Treasury bills (T-bills) – Short-term debt instruments issued by the Government of India, and are presently issued in three tenors, namely, 91-day, 182-day and 364-day. Treasury bills are zero-coupon securities and pay no interest. Instead, they are issued at a discount and redeemed at the face value at maturity.
• Cash Management Bills (CMBs) – They are similar to T-bills but are issued for maturities of less than 91 days.
• Dated G-Secs – They carry a fixed or floating coupon (interest rate) which is paid on the face value, on a half-yearly basis. Generally, the tenor of dated securities ranges from 5 years to 40 years.

2.1.2 Popular G-Secs

The following are the popular G-Secs issued by the Central Government, State Government and Local Authorities:

2.2 Eligible Assessees

The exemptions under Entry 13D and 13E of Schedule IV are available to the FIIs and BIS.

In view of the Note 4(b) to Schedule IV read with Section 210(6)(a) of the ITA 2025 (corresponding to the Explanation to Section 115AD of the ITA 1961), ‘Foreign Institutional Investor’ means such investors as the Central Government may notify, which in practice means Foreign Portfolio Investors registered with SEBI.

Note 4(a) to Schedule IV defines that the ‘Bank for International Settlements’ means the institution established at the Hague Conference in 1930 and headquartered at Basel, Switzerland.

2.3 Conditions to Claim the Exemption

The exemption is available only if the FII or the BIS furnishes information in the form and manner to be prescribed. The detailed requirements, such as the form, the particulars to be reported and the timelines, will be notified through rules.

2.4 Period of Exemption

These entries have been inserted with effect from 01-04-2026 without any sunset date. Thus, the exemption shall be available to the eligible assessees for the eligible incomes earned on or after 01-04-2026, i.e., tax year 2026-27 and onwards.

2.5 Exemption from TDS

Section 393(2) [Table, S. No. 15] requires the deduction of tax from income payable to an FII in respect of securities referred to in Section 210(1). After the insertion of Entries 13D and 13E, income from Government securities is exempt and no longer forms part of the income from securities referred to in Section 210(1). Thus, no tax will be deductible by the payer from the interest payable on G-Secs to FIIs and the BIS or the capital gains arising therefrom.

3. Comparison of Earlier and Amended Tax Regime

The table below compares the implications on the FIIs before and after the amendment:

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