THE Income Tax (Amendment) Ordinance 2026 received Presidential assent on the 5th of June, 2026. The Budget session was over on 18th April, 2026 and the Monsoon session is likely to commence in end July/early August. Crucial elections took place in March/April when important decisions are postponed. But, at some point, the government has to smell the coffee. The foreign exchange situation in India has worsened although we are not exactly in dire situation but the shadow of the unending war in the Middle East has very severely affected India and consumers are feeling the pinch. The stock markets- rightly or wrongly- considered a barometer of the country's fiscal health has tumbled; there is constant selling by the FIIs in the stock market and the pressure on the rupee is immense with the rupee being perilously close to the psychological level of INR 100 to the dollar. So much so that the PM had to appeal to the patriotic instincts of the citizens to cut consumption of basically everything that affects the outflow of the precious foreign exchange. But that alone is unlikely to stench the haemorrhage. In the circumstances, the government had to come out with some concrete measures.

Time and again, in times of foreign exchange crisis, the government of the day has appealed to the Non-resident Indians (NRI) and later persons of Indian Origin (PIO) for investment in foreign exchange and various non-resident deposit schemes have been developed over the years. The PIO category got transformed in Overseas Citizens of India (OCI) with more relaxed requirement for VISA, registration etc., from 2015 onwards. After the opening up of the economy sops have also been extended to FIIs/FPIs who invested mostly in equities. But this year and even last year, the FIIs have been spoilsports; they have been selling in the Indian equity market and taking out money thereby further exacerbating the foreign exchange reserve and also contributing to further devaluation of the rupee as against the dollar.

The, Finance Minister in her budget speech of 2026 had in fact made a few announcements in relation to the Financial Sector.

"I propose a comprehensive review of the Foreign Exchange Management (Non-debt Instruments) Rules to create a more contemporary, user-friendly framework for foreign investments, consistent with India's evolving economic priorities." (Para. 44), besides promising further 'Ease of Doing Business.'

As against the traditional catchment area of NRI/ OCI, the FM also promised to ease restrictions on investments by 'individual persons resident outside India.' The FM stated:

"Individual Persons Resident Outside India (PROI) will be permitted to invest in equity instruments of listed Indian companies through the Portfolio Investment Scheme. It is also proposed to increase the investment limit for an individual PROI under this scheme from 5% to 10%, with an overall investment individual PROIs to 24%, from the current 10%." (Para 47).

Under the Portfolio investment scheme, NRIs and PIOs can buy and sell shares and convertible debentures on recognized Indian stock exchanges through an RBI authorized dealer bank in India subject to certain conditions. The PROI category will include NRIs/PIOs but may also include individual foreign nationals who are not residents under the FEMA regulations.

On the 4th June, 2026, a day before the announcement of the Monetary Policy by the RBI governor, it was reported that the government has introduced an Ordinance to ament the Income Tax Act, 2025 to exempt interest and capital gains in respect of certain securities. In a perfectly synchronised move, the President gave her assent to the Ordinance in the morning of 5th June, 2026 and the RBI Governor in his speech announcing the monetary policy made a reference to the same. In fact, it is the RBI Governor who announced some of the measures to attract foreign capital. The relevant part of the Governor's speech on the occasion was as follows:

"To attract foreign capital, I also have a few measures to announce today.

First, for government securities under the Fully Accessible Route (FAR), we are expanding the universe of 'specified securities' by including all new issuances of 15-, 30- and 40-year tenor G-secs. In addition, limits pertaining to short-term investment, concentration and individual securities on FPI investment under the General Route are being removed. These measures along with the tax benefits provided by the government this morning should help attract foreign capital for government borrowing.

Second, the limits for investment by NRIs and OCIs in equity instruments traded on the stock market without SEBI registration are being increased. Further, the same facility is being extended to all individual Persons Resident Outside India at par with that available to NRIs and OCIs.

Third, a facility of concessional forex swap will be provided for about four months till 30th September 2026 to incentivize ECBs (External Commercial Borrowings) by Public Sector Undertakings.

Fourth, a similar facility for bearing the full hedging cost shall be provided again till 30th September to the Authorised Dealer banks for raising fresh 3 to 5-year FCNR (B) deposits.

Fifth, it is proposed to restore the time for realisation of export proceeds to nine months. This was earlier increased to 15 months.

I may mention that while these measures are expected to strengthen our balance of payments, we will continue to make right policy adjustments as may be required to further promote exports and attract and incentivise capital inflows."¹

Whenever there are foreign exchange crisis and depreciation of the rupee, there is a clamour for reducing/ abolishing capital gains tax/ STT, more particularly for the FIIs. It is asserted that India is the only country to charge tax on capital gains from share transactions and that FIIs have other markets to invest and consequently India becomes less competitive to attract foreign capital. It is not known whether the government will ultimately yield to these demands.

For the moment, what has been done is that through the Ordinance, incentives have been provided to foreign investors in respect of income from government securities. The incentive has been so structured that the tax benefit is limited to somewhat patient capital with a lock-in of at least 3-5 years through a combination of fiscal and monetary policy.

Under the scheme of the new Income Tax Act, 2025, exemptions under section 10 of the erstwhile Income Tax Act 1961 are now broken up into seven schedules depending on the nature of the exemptions. Schedule IV is in respect of income not to be included in total income of non-residents, foreign companies and other such persons. At the passing of the Act in 2025, this schedule had 14 items and 5 notes. By 2026, serial no 13 had already had three new items, 13A, 13B, 13C. By this ordinance the following two new items 13D and 13E have been added along with a new note 4. These are as follows:

Note 4: For the purposes of Sl. Nos. 13D and 13E, --

-  "Bank for International Settlements" means the Bank for International Settlements established at the Hague Conference in 1930 and headquartered at Basel, Switzerland;

-  "Foreign Institutional Investor" shall have the meaning assigned to it in section 210(6)(a);

-  "Government security" shall have the same meaning as assigned to it in section 2(f) of the Government Securities Act, 2006.'

As mentioned earlier, for the last few years, FIIs have been net sellers in the Indian stock market. It has been reported that foreign investors took out roughly INR 2.6 lakh crore from the Indian equity market in the first five months of 2026 alone that is in excess of INR 1.66 lakh crore taken out in the whole of 2025.

On the other hand, on the debt side, foreign investors are reported to have put in over INR 17,000 crores through the Fully Accessible Route (FAR) suggesting some interest in Indian fixed income instruments.²

Foreign investors can invest in government securities either through the general route or the Fully Accessible Route (FAR). The figure for Foreign Portfolio investments in Government securities as on 12th May, 2026 has been reported as follows:³

It was therefore apparent there was investor interest in Indian G-Secs and hence as mentioned in the RBI Governor's speech, the FAR has been expanded to new issuance of 15-year G Secs, new issuance of 30 -year G Secs, new issuance of 40-year G secs and Sovereign Green Bonds issued in FAR -eligible tenors. ⁴

To understand the implications of the amendments, it is necessary to consider the existing regime in respect of taxation of interest and of capital gains in respect of government securities. Prior to the changes now brought in, Foreign Institutional Investors (FIIs), including SEBI-registered Foreign Portfolio Investors (FPIs), were taxed under Section 210 of the Income-tax Act, 2025. Any income earned from investments in Government Securities (G-Secs) was subject to tax as follows:

As a result, a portion of the returns earned by foreign investors from holding or trading G Secs was payable as tax in India. We may however note that there was a concessional rate under section 115AD and concessional withholding tax rate @ 5% under section 194 LD of the Income Tax Act, 1961 in respect of interest income earned by Foreign Portfolio Investors and other Qualified Foreign Investors on specific Indian debt instruments. But the benefit was no longer available beyond 2023.

Now, as a result of the amendment brought in by this ordinance, all these streams of income from the Indian Government securities will be tax exempt. The comparative position of the tax treatment before and after is as follows:

Apert from the FIIs, we notice that similar concessions have also been provided to the Bank of International Settlements (BIS ), an institution owned by central banks and is a forum for monetary and financial cooperation among central banks and acts as a manager for central banks and international organizations. BIS has an investment pool which is a suite of collective investment schemes and fixed income products managed by the BIS.⁵ Although BIS has no investment in India as yet, perhaps the government hopes that with the exemptions now provided, it will invest in Indian government securities.

The effect of this amendment is that for foreign institutional investors investing in such government securities, the entire interest on prescribed government securities will be completely exempt from tax in India as against the current domestic tax rate of 20% as specified in section 210 of the Income Tax Act, 2025 or the treaty rate as may have been settled in the respective tax treaties, if any.

Apart from the above changes brought through the Ordinance, the item that is creating the maximum buzz is the changes in the regulatory framework of the Foreign Currency Non- Resident (Bank)- FCNR(B) deposits. Interest on such deposits are already exempt from taxation under the Indian Income Tax under section 10(15(iv)(fa) of the ITA 1961 corresponding to serial number 14 of Schedule IV of the ITA 2025 although the same may be taxable in the home country of the investor. As noted in the RBI Governor's speech, the RBI will provide full hedging cost in respect of FCNR(B) deposits till 30th September, 2026.

It has been widely reported that Banks have been pushed to go all out for FCNR (B) deposits from the diaspora during this window. And various calculations put the likely total inflow in this period to 50~70 bn USD. Apparently, with the RBI bearing the hedging cost, Banks can offer some 2-3% extra for foreign currency deposits. NRIs with investable funds will certainly benefit from the arrangement. Apparently, Banks can even facilitate loans from foreign banks for clients by offering a standby letter of guarantee. It has been reported that an NRI putting in a part of own money may be helped to put in additional amount on loan arranged by the deposit taking bank can earn a return of 14% even after adjusting for a processing fee of about 1%.⁶

The FCNR (B) play is not without cost. The RBI itself in the introduction to the FCNR scheme- states- "The Foreign Currency Non-Resident (FCNR(B)) scheme was introduced with effect from May 15, 1993 to replace the then prevailing FCNR(A) scheme introduced in 1975, where the foreign exchange risk was borne by RBI and subsequently by the Govt. of India. The FCNR(A) scheme was withdrawn in August, 1994 in view of its implications for the central bank's balance sheet and quasi-fiscal costs to the Government. (…)"⁷

In due course, a proper cost-benefit analysis of the scheme will therefore be in order.

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¹ https://www.youtube.com/watch?v=9u3MtqbdZ44 and https://informistmedia.com/MoneyWire/52094/rbi-policy-text-governor-sanjay-malhotra-s-statement

² https://www.bajajbroking.in/share-market-news/govt-removes-12-5-percent-ltcg-20-percent-withholding-tax-on-fii-g-secs

³ https://www.pib.gov.in/PressReleasePage.aspx?PRID=2269719&reg=48&lang=2

⁴ ibid

⁵ https://taxguru.in/income-tax/frequently-asked-questions-faqs-bis-exemption.html

⁶ See, Economic Times of the 13th June 2026- Banks ask Reserve Bank to clear air on guarantee rule for FCNR play - by Sugata Ghosh

⁷ https://www.rbi.org.in/commonman/english/scripts/Notification.aspx?Id=780#top