Retail non-resident investors remain liable for tax on interest and capital gains, while FPIs receive full relief
Non-Resident Indians (NRIs) investing directly in Indian Government Securities (G-Secs) will not benefit from the income tax exemption recently granted to Foreign Portfolio Investors (FPIs), according to government officials.
The tax relief, introduced through an ordinance issued on May 5, exempts FPIs and the Bank for International Settlements (BIS) from paying income tax on interest income and capital gains earned from investments in Government Securities. The exemption applies to income arising on or after April 1, 2026.
However, officials clarified that the measure does not extend to NRIs investing in G-Secs on an individual basis. NRIs will continue to be taxed under existing provisions of the Income Tax Act, with rates determined by domestic tax laws and applicable Double Taxation Avoidance Agreements (DTAAs).
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Tax experts said there has been no change in the tax treatment of NRIs. Interest earned on Government Securities generally attracts a 20 per cent tax rate, although certain notified securities and rupee bonds may qualify for a reduced rate of 5 per cent
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Long-term capital gains are taxed at 12.5 per cent, while short-term capital gains are taxed at 20 per cent, subject to treaty benefits where applicable
Industry experts noted that the government’s latest move is aimed primarily at attracting institutional foreign investment into India’s debt market. While FPIs have received a blanket exemption, similar benefits have not been extended to individual overseas investors.
Some tax specialists argued that NRIs, who also contribute foreign capital to India, could be considered for comparable incentives in the future. Industry bodies are expected to seek a review of the current framework and push for broader tax relief.
Experts also highlighted that NRIs can indirectly access the exemption by investing through offshore funds or GIFT City International Financial Services Centre (IFSC) funds registered as FPIs. Regulatory changes introduced earlier by the Securities and Exchange Board of India (SEBI) have already eased investment limits for such structures focused exclusively on Government Securities.
