Tax Exemptions Ignite Global Appetite: India Expands FAR, Promises Boom for FPIs in G-Sec Markets

Tax Exemptions Ignite Global Appetite: India Expands FAR, Promises Boom for FPIs in G-Sec Markets​

Government Rolls Out Landmark Tax Reforms to Boost Foreign Investment in Debt Market​

The government has introduced a pivotal series of reforms aimed at strengthening India's debt capital markets and attracting stable long-term foreign investment. These measures significantly boost the appeal of Government Securities (G-Secs) for global institutional investors. The core strategy involves easing regulatory hurdles and offering major tax concessions to Foreign Portfolio Investors (FPIs).

These reforms are designed not merely to deepen the G-Sec market but also to diversify the investor base. Greater foreign participation is anticipated to provide crucial funding for national priorities, including infrastructure, manufacturing, urban development, and climate initiatives. This influx of capital will substantially improve market liquidity and enhance price discovery across the debt instruments.

Tax Incentives Transform Foreign Investment Landscape​

Previously, FIIs and FPIs were subject to various taxation regimes regarding income from G-Secs. Interest income earned on these securities was taxed at 20%. Short-term capital gains (STCG) were taxed at 30%, while long-term capital gains (LTCG) faced a tax rate of 12.5%.

The new regime, effective from April 1, 2026, introduces major benefits through the Income-tax (Amendment) Ordinance, 2026. FPIs and FIIs are now granted full exemption from both interest income earned from G-Secs and all capital gains arising from their sale, transfer, exchange, or redemption.

Expanding Investment Horizons: The New FAR Framework​

Recognizing strong investor appetite, the government has substantially expanded the scope of the Fully Accessible Route (FAR). This expansion broadens investment opportunities across a wider spectrum of sovereign debt instruments.

The revamped FAR framework now explicitly includes new issuances of 15-year, 30-year, and 40-year Government Securities. Furthermore, Sovereign Green Bonds (SGrBs) issued in FAR-eligible tenors have been added to the accessible list. These changes encourage greater participation in long-duration sovereign debt markets globally.

Simplifying Rules: Changes Under the General Route​

To ensure a seamless investment experience comparable to leading global capital markets, several restrictions under the standard General Route have been removed. The government has abolished the short-term investment limit, the concentration limit, and the security-wise investment limit for FPIs.

The overall investment limits remain governed by the outstanding stock of securities. Foreign investors can still hold a maximum of 6% of the outstanding Central Government Securities (CGS) stock and 2% of the State Government Securities (SGSs). The existing 'General' and 'Long-Term' categories for FPI investments are now consolidated into single investment limits per security type.

Tracking Foreign Participation in G-Sec Markets​

As on May 12, 2026, FPI holdings in G-Secs amounted to ₹3,75,171 crore, constituting 3.34% of the total outstanding G-Sec stock of ₹112.42 lakh crore. The Fully Accessible Route (FAR) was a significant driver of this interest.

FPI investments through FAR reached ₹3,21,080 crore, representing 6.74% of the eligible FAR stock of ₹47.63 lakh crore. In comparison, FPI holdings under the General Route stood at ₹54,091 crore against a General Route outstanding stock of ₹64.78 lakh crore.

Deciphering the Market Dynamics​

These targeted reforms are set to drive deeper and more globally integrated capital markets in India. By streamlining market access and removing operational complexities, the government is fostering an environment conducive to attracting sustained long-term foreign capital. This progress supports the ultimate goal of achieving greater inclusion of Indian bonds within global financial indices.