US overtakes Mauritius to become India’s 2nd largest FDI source as inflows cross $11 billion mark

The United States has become India's second-largest source of Foreign Direct Investment (FDI) in FY2025-26, overtaking Mauritius — a shift marking a structur...

What Happened

The United States has become India's second-largest source of Foreign Direct Investment (FDI) in FY2025-26, overtaking Mauritius — a shift marking a structural change in India's FDI geography.
US equity infusions more than doubled in FY26, crossing $11 billion; in the first half of FY26 (April–September 2025) alone, the US contributed $6.6 billion vs. Mauritius's $3.5 billion, with Singapore leading at $12 billion.
Singapore retains the top position in FDI inflows to India.
Sectors driving US FDI include food processing, computer hardware, and shipping, alongside long-established technology and financial services flows.
In FY24-25, Singapore led with ~30% of total FDI, followed by Mauritius (~17%) and the US (~11%); the US surge in FY26 marks the first time it has overtaken Mauritius in recent years.

Static Topic Bridges

India's FDI Policy Framework: FEMA, Automatic Route, and Government Route

Foreign Direct Investment in India is governed primarily by the Foreign Exchange Management Act, 1999 (FEMA) and rules issued under it, operationalised through the Consolidated FDI Policy issued by the Department for Promotion of Industry and Internal Trade (DPIIT), Ministry of Commerce and Industry. FDI is permitted through two routes: the Automatic Route (no prior approval from the RBI or Government required) and the Government Route (prior government approval mandatory). For sectors not specifically covered by the FDI Policy, 100% FDI under the automatic route is permitted as the default. Sectoral caps exist in sensitive sectors — for example, defence manufacturing allows up to 74% FDI under the automatic route, with higher investment requiring government approval.

Statutory basis: FEMA 1999; the Non-Debt Instruments (NDI) Rules, 2019 govern FDI.
DPIIT (under the Ministry of Commerce and Industry) is the nodal body for FDI policy.
In FY2024-25, total FDI equity inflows into India: approximately $81.04 billion.
Top FDI source countries (FY24-25): Singapore (~30%), Mauritius (~17%), USA (~11%).
Top FDI recipient states: typically Maharashtra, Karnataka, Delhi, Gujarat.

Connection to this news: The US surge reflects growing investments through the automatic route in technology, manufacturing, and food processing — sectors that do not require government clearance, making the US a more direct and transparent FDI channel compared to Mauritius.

The Mauritius Route and Treaty Shopping

For decades, Mauritius was India's single largest FDI source — not primarily due to genuine Mauritian capital, but because of treaty shopping: third-country investors (often from the US, UK, or Europe) routed investments through Mauritius-registered shell entities to exploit the India-Mauritius Double Taxation Avoidance Agreement (DTAA), signed in 1982. Under Article 13(4) of the DTAA, capital gains on Indian shares were taxable only in the country of residence of the investor (Mauritius), which imposed zero capital gains tax — creating a full exemption for investors. This made Mauritius an attractive conduit jurisdiction, inflating its FDI statistics beyond its actual economic weight. The 2016 protocol to the DTAA introduced a source-based taxation of capital gains from shares acquired post-April 1, 2017, with a two-year transition. A 2024 protocol further introduced the Principal Purpose Test (PPT), under which treaty benefits are denied if the primary purpose of the investment structure is to obtain those benefits. The Supreme Court in January 2026 held that a Tax Residency Certificate (TRC) from Mauritius is not conclusive proof of treaty entitlement.

India-Mauritius DTAA signed: 1982.
2016 Protocol: source-based capital gains tax introduced for post-2017 acquisitions; grandfathering for pre-2017 investments.
2024 Protocol: Principal Purpose Test (PPT) adopted to curb treaty shopping.
Supreme Court ruling (January 2026): TRC not conclusive; courts can look through to substance.
Post-2017 tightening has progressively reduced the tax arbitrage that made Mauritius attractive.

Connection to this news: As the Mauritius tax-arbitrage window has shrunk through successive treaty amendments, investors are increasingly routing capital directly from their actual home jurisdiction, explaining the US's rise to second position with genuine equity infusions.

FDI in Key Sectors: Food Processing, Computer Hardware, Shipping

Food Processing: The nodal ministry is the Ministry of Food Processing Industries (MoFPI). FDI up to 100% is permitted under the automatic route in food processing, including for trading (including through e-commerce) of Indian-manufactured food products. The PLI Scheme for Food Processing was approved on March 31, 2021, with an outlay of ₹10,900 crore (FY2021-22 to FY2026-27), targeting processed food exports and import substitution.

Computer Hardware and Electronics: The PLI Scheme for Large-Scale Electronics Manufacturing covers mobile phones and electronic components; a separate PLI for non-semiconductor electronics components (₹22,919 crore) was approved by the Cabinet to build a domestic component ecosystem.

Connection to this news: US technology and food companies are among the largest beneficiaries of India's PLI schemes and the 100% automatic route FDI policy, directly driving the sectoral surge mentioned in the article.

Key Facts & Data

India's FDI equity inflows FY2024-25: ~$81.04 billion (PIB data).
FDI source country ranking FY24-25: Singapore (~30%), Mauritius (~17%), USA (~11%).
FDI source country ranking H1 FY26 (Apr–Sep 2025): Singapore ($12 billion, ~34%), USA ($6.6 billion), Mauritius ($3.5 billion).
US FDI into India crossed $11 billion in FY2025-26 (full year equity infusion).
India-Mauritius DTAA signed 1982; 2016 protocol introduced source-based capital gains tax (post-April 2017 acquisitions).
2024 protocol introduced Principal Purpose Test (PPT) — treaty benefits denied if primary purpose is tax avoidance.
Supreme Court ruling (January 2026): TRC not conclusive proof of treaty entitlement.
FDI statutory basis: FEMA 1999; NDI Rules 2019; nodal policy body: DPIIT.
PLI Scheme for Food Processing: outlay ₹10,900 crore (FY21-22 to FY26-27), nodal ministry: MoFPI.
Sectors attracting US FDI in FY26: food processing, computer hardware, shipping.