Government Unleashes Mega-Reform: Tax Exemptions and New Rules Spark Massive Inflow into G-Secs and Equity Markets

Government Unleashes Mega-Reform: Tax Exemptions and New Rules Spark Massive Inflow into G-Secs and Equity Markets​

In a landmark move aimed at cementing its status as a global investment hub, the Ministry of Finance has unveiled sweeping market reforms. These measures are designed to drastically deepen both the Government Securities (G-Sec) and equity markets in India. The initiatives specifically target foreign investors by simplifying access and introducing highly competitive tax incentives.

These strategic steps follow previous efforts to boost the ease of doing business within Indian capital markets. By expanding accessibility across investment segments, the government is actively inviting stable, long-term foreign capital flows into the nation's economy.

Liberalization Boost for PROI Investment in Equities​

A significant shift in market access involves individual Persons Resident Outside India (PROIs). The Union Minister for Finance and Corporate Affairs confirmed that PROIs will now be permitted to invest in listed Indian company equity instruments via a specific Portfolio Investment Scheme. This facility was previously restricted to NRIs and OCIs only.

The investment limits under this new scheme have been substantially enhanced. An individual PROI can now invest up to 10% in any single company, an increase from the previous limit of 5%. Furthermore, the overall investment limit for all individual PROIs has risen to 24%, doubling the current limit of 10%.

To implement these changes, the Department of Economic Affairs (DEA) is notifying the Foreign Exchange Management (Non-Debt Instruments) (Third Amendment) Rules, 2026. These simplified onboarding processes and reduced compliance requirements are expected to attract a broader base of stable individual foreign investors in Indian equity markets.

Easing FPI Participation in Government Securities​

To enhance participation from Foreign Portfolio Investors (FPIs) in the G-Sec market, the regulatory framework has been substantially refined. The government has expanded the list of securities available under the Fully Accessible Route (FAR). This includes new issuances of government securities with tenors spanning 15, 30, and 40 years. Sovereign Green Bonds (SGrBs) have also been added to the FAR-eligible securities.

For FPI investments conducted through the General Route, three major restrictions have been removed: the short-term investment limit, the concentration limit, and the security-wise limit. However, two core quantitative limits remain—a 6 per cent overall investment cap on Central Government securities and a 2 per cent limit for State Government securities (SGSs). The sub-categories of investment limits have also been unified into single limits for G-Secs and SGSs.

Tax Exemptions Signal Commitment to Long-Term Capital Flows​

In a move intended to align Indian taxation with global financial hubs, the government has decided on a competitive tax regime for FPI investments in Government Securities. These investments will be exempted from income tax on any interest or capital gain. This pivotal step is set to attract patient and durable foreign capital.

The exemption applies to all interest or capital gains arising to FPIs on or after April 1, 2026, concerning their G-Sec investments. The Bank for International Settlements (BIS) is also granted similar tax exemption status regarding interest or capital gains from its holdings in G-Secs. These policies are designed to ensure a stable and systematic inflow of long-term investors, including insurance companies and pension funds.

Outlook on Market Deepening and Foreign Exchange Inflows​

These combined reforms seek to reduce operational complexities and provide a highly seamless investment experience comparable to leading international financial markets. The market structure is being bolstered to encourage wider participation from global investors seeking exposure to one of the world's fastest-growing major economies.

By deepening both the equity market for individual PROIs and the stability of the G-Sec market, these measures are anticipated to generate substantial foreign exchange inflows for the nation. The enhancements aim to nurture a smooth yield curve while attracting systematic long-term capital crucial for national economic growth.