Foreign Portfolio Investment Reforms in G-Secs

The Government of India has introduced a comprehensive set of structural reforms aimed at enhancing foreign institutional participation in the Government Securities (G-Secs) market. Promulgated via the Income-tax (Amendment) Ordinance, 2026, the new framework implements complete tax exemptions on interest income and capital gains for Foreign Portfolio Investors (FPIs) retrospectively from April 1, 2026. Side-by-side, the Reserve Bank of India (RBI) has expanded the Fully Accessible Route (FAR) and relaxed investment boundaries under the General Route. These measures seek to deepen domestic sovereign debt markets, lower public borrowing costs, and integrate Indian capital markets into global fixed-income workflows.

Overhaul of the G-Sec Taxation Regime

The primary friction point for global asset managers investing in Indian debt has been the domestic tax liabilities on sovereign paper. The 2026 fiscal correction establishes parity between India and standard international debt jurisdictions.

Transition of Tax Rates for FPIs in G-Secs

Key Caveats and Multi-lateral Extensions

• Asymmetry on Capital Losses: Since capital gains are now entirely exempt from income tax, foreign portfolio managers cannot utilize or carry forward any corresponding capital losses arising from G-Sec transactions to offset other tax liabilities.
• Corporate Bond Exclusion: The tax exemption applies strictly to sovereign instruments as defined under Section 2(f) of the Government Securities Act, 2006. Interest income and capital gains from Indian corporate bonds remain fully taxable under domestic law.
• Extension to the Bank for International Settlements (BIS): To attract central bank reserves into domestic debt, the exact same tax exemptions on interest and capital gains have been extended to the BIS.

Expansion of the Fully Accessible Route (FAR)

The Fully Accessible Route, introduced by the RBI in April 2020, allows non-residents to invest in specified government bonds without any quantitative or concentration caps. To attract long-term, patient institutional capital like pension funds and sovereign wealth funds, the central bank has widened the FAR universe.

New Additions to the FAR Basket

• Long-Tenor Papers: The RBI has added all new issuances of 15-year, 30-year, and 40-year government bonds into the FAR channel. Prior to this, the route was mostly populated by 5-year, 7-year, and 10-year benchmarks.
• Sovereign Green Bonds (SGrBs): All new issuances of SGrBs falling within FAR-eligible tenors are now accessible to foreign investors without any volume restrictions, aiding the financing of sustainable public infrastructure projects.

Rationalization of the General Route

For G-Secs that do not fall under the open-access FAR framework, foreign investments are regulated via the General Route. The government has systematically dismantled operational friction points within this channel.

Removal of Micro-Prudential Caps

• Abolition of Internal Restrictions: FPI investments under the General Route are no longer subject to short-term investment ceilings, concentration limits, or security-wise investment restrictions.
• Category Consolidation: The administrative sub-categories of “general” and “long-term” FPI debt buyers have been merged into a unified regulatory slot.
• Retention of Macro Ceilings: The systemic aggregate investment caps remain intact to protect macro-financial stability. FPI investments under the General Route are held at 6% of the total outstanding stock of Central Government Securities and 2% of the outstanding stock of State Government Securities (SGSs).
• Voluntary Retention Route (VRR) Integration: The dedicated investment limits previously allocated to the VRR channel have been subsumed into the general investment limits, simplifying portfolio calculations for foreign funds.

Macroeconomic Impact Analysis

The multi-layered modifications to the sovereign debt infrastructure are expected to alter India’s balance of payments dynamics.

Inflow Stabilization and Currency Protection

The structural transformation provides an institutional buffer against volatile capital flights. While equity FPIs can be transactional and prone to global risk-off sentiments, institutional bond investors typically lock in capital over the long term. This steady inflow helps defend the Indian Rupee against extreme depreciation pressures during global geopolitical shocks.

Yield Curve Refinement and Benchmarking

By drawing global institutional bids into 30-year and 40-year papers, the domestic debt market can build a smooth, liquid yield curve across all maturities. A transparent long-term yield curve sets precise pricing benchmarks for corporate borrowers, commercial banks, and long-gestation infrastructure projects.

IASPOINT Booster Facts for UPSC

• The G-Sec Holding Profile: As of mid-May 2026, FPIs held approximately ₹3.75 lakh crore worth of Indian G-Secs, representing around 3.34% of the total outstanding public debt stock of ₹112.42 lakh crore. The FAR channel accounts for over 85% of total foreign debt allocations.
• Global Bond Index Inclusion: This reform capitalizes on India’s inclusion in major emerging market indices like the JPMorgan GBI-EM index and the Bloomberg Emerging Market Local Currency Index, facilitating passive fund inflows into the domestic market.
• Ordinance Power Timelines: Because Parliament was not in session when these updates were enacted, the executive utilized the President’s legislative powers under Article 123 of the Constitution to promulgate the Income-tax (Amendment) Ordinance, 2026.
• Person Resident Outside India (PROI) Equity Upgrades: Alongside debt changes, the government amended the Foreign Exchange Management (Non-Debt Instruments) Rules to allow individual foreign nationals to access the Portfolio Investment Scheme for equities, doubling the individual limit from 5% to 10% in listed Indian companies.