Tax Exemption on Interest and Capital Gains for FIIs and BIS: Impact of Income-tax (Amendment) Ordinance, 2026
The Income-tax (Amendment) Ordinance, 2026 brings a targeted set of changes to the Income-tax Act, 2025, specifically revising Schedule W with retrospective effect from 1 April 2026. This Ordinance introduces specific income-tax exemptions for Foreign Institutional Investors (FIIs) and the Bank for International Settlements (BIS) in relation to investments in Government securities.
These amendments are structured to incentivise participation of global institutional capital in Indian Government securities, while retaining regulatory oversight through mandatory information-furnishing conditions.
Constitutional Background and Legislative Context
Ordinance Route Under Article 123
The measure has been promulgated by the President of India under clause (1) of Article 123 of the Constitution, based on satisfaction that:
- Parliament was not in session, and
- Immediate legislative action was necessary.
Accordingly, the President issued The Income-tax (Amendment) Ordinance, 2026 (No. 2 of 2026) on 5 June 2026 / Jyaishtha 15, 1948 (Saka), in the Seventy-seventh year of the Republic of India.
Short Title and Commencement
The Ordinance provides:
Short Title
- It is cited as the Income-tax (Amendment) Ordinance, 2026.
Commencement
- It is deemed to have come into force on 1 April 2026, thereby operating retrospectively from the start of the financial year.
Note: The retrospective commencement date is essential for assessee planning, as interest and capital gains arising on or after 1 April 2026 are covered by the new exemption regime, provided conditions are met.
Amendments to Schedule W of the Income-tax Act, 2025
The core modification is to Schedule W of the Income-tax Act, 2025. The Ordinance inserts new entries in the existing table and adds a new explanatory Note 4.
New Serial Entries 13D and 13E
In the table under Schedule W, immediately after serial number 13C and its related entries, two new exemption lines are inserted: 13D and 13E.
Entry 13D – Exemption for Foreign Institutional Investors
The newly inserted Sl. No. 13D covers the following:
Nature of income covered
- Any interest on Government security; and
- Any capital gains arising from the sale, exchange or transfer of such Government security.
Eligible category of assessee
- Foreign Institutional Investor.
Condition
- The exemption is conditional upon furnishing of information in such form and manner as may be prescribed.
In essence, once the relevant rules or notifications are issued, FIIs satisfying the prescribed compliance requirements would not be liable to income-tax in India in respect of:
- Interest received on Government securities, and
- Capital gains realised upon sale, exchange or transfer of those Government securities.
Entry 13E – Exemption for Bank for International Settlements
Similarly, Sl. No. 13E mirrors the structure of 13D, but designates a different eligible entity:
Nature of income covered
- Any interest on Government security; and
- Any capital gains arising from the sale, exchange or transfer of such Government security.
Eligible entity
- Bank for International Settlements.
Condition
- Exemption is again subject to furnishing of information in the prescribed form and manner.
This makes the BIS eligible for complete tax exemption in India on interest and capital gains derived from Government securities, subject to satisfying the procedural conditions to be specified by the authorities.
Practical implication: FIIs and the BIS would need to track the relevant rules once notified—likely specifying forms, timelines, and documentation—to ensure their interest income and capital gains on Government securities remain fully exempt.