India scrapping tax for foreign investors in govt bonds aimed at inclusion in Bloomberg index, govt official says

The Government of India has announced the removal of capital gains tax and withholding tax on interest income for foreign portfolio investors (FPIs) investin...

What Happened

The Government of India has announced the removal of capital gains tax and withholding tax on interest income for foreign portfolio investors (FPIs) investing in Government Securities (G-secs) designated under the Fully Accessible Route (FAR).
The policy change, effective retroactively from April 1, 2026, was implemented via an ordinance in early June 2026.
The move is directly aimed at meeting the key remaining conditions for India's inclusion in the Bloomberg Global Aggregate Index — a benchmark tracked by passive fixed-income funds globally.
A senior government official confirmed that the tax removal is specifically targeted at Bloomberg index inclusion, following earlier inclusion in the JP Morgan GBI-EM Index in 2024.
Bloomberg Index Services had deferred India's inclusion in January 2026, citing investor concerns about tax processing complexity, settlement delays, post-trade workflows, and fund registration timelines — alongside the withholding tax issue.
Alongside the tax change, the Reserve Bank of India (RBI) has widened the FAR framework to include all new issuances of 15-, 30-, and 40-year G-secs, as well as sovereign green bonds across multiple maturities.

Static Topic Bridges

Fully Accessible Route (FAR)

The Fully Accessible Route is a framework introduced by the Reserve Bank of India in March 2020 that allows unrestricted foreign investment in specified Government of India Securities without any quantitative caps. It was designed to provide global investors a channel into the Indian G-sec market equivalent in accessibility to that required by major bond index providers.

FAR bonds carry no upper limit on the amount a Foreign Portfolio Investor can hold, unlike the Investment Limit (IL) framework that governs non-FAR G-sec investment.
Eligible investors include FPIs, Non-Resident Indians (NRIs), Overseas Citizens of India (OCIs), and other eligible non-residents.
FAR-designated securities are the only G-secs eligible for consideration under major global bond indices (JP Morgan, Bloomberg, FTSE Russell).
As of June 2026, the FAR list includes all new issuances of 10-, 14-, 15-, 30-, and 40-year G-secs, sovereign green bonds, and select existing long-term securities.
FAR securities attracted approximately ₹75,000 crore in foreign inflows following JP Morgan GBI-EM inclusion (from June 2024).

Connection to this news: The tax removal applies specifically to FAR-designated securities — the government has extended the FAR concession from mere market access to full tax neutrality, removing the last major fiscal friction for index-tracking foreign funds.

Bloomberg Global Aggregate Index

The Bloomberg Global Aggregate Index (Bloomberg Global Agg) is one of the world's most widely tracked fixed-income benchmarks, covering investment-grade government, government-related, corporate, and securitised bonds from 27 local currency markets across developed and emerging economies. It is tracked by an estimated USD 3–4 trillion in assets under management (AUM).

Index inclusion criteria include: investment-grade sovereign or quasi-sovereign status, minimum issue size, at least one year to maturity, and — critically — market accessibility including settlement, trading automation, tax neutrality, and minimal registration barriers.
China's bonds were included in the Bloomberg Global Agg in 2019 after enhancements including delivery-versus-payment settlement, block trade allocation capability, and clarification of tax collection policy.
India was placed on a "watchlist" for potential inclusion by Bloomberg Index Services in 2025; formal investor feedback was solicited in September 2025.
Bloomberg deferred a decision in January 2026, specifically citing withholding tax processing complexity, settlement workflows, and registration timelines.
Projected inflows from Bloomberg Global Agg inclusion: USD 20–25 billion in passive foreign investment at an estimated 7–10% index weight.

Connection to this news: The capital gains and withholding tax removal directly addresses the primary barrier that caused the January 2026 deferral, bringing India's G-sec market into closer alignment with the tax neutrality standard that Bloomberg requires of eligible markets.

JP Morgan GBI-EM Index — India's Precedent

The JP Morgan Government Bond Index – Emerging Markets (GBI-EM) is the leading benchmark for emerging-market local-currency government bonds. India's inclusion in this index from June 28, 2024 (with a phased weight increase over 10 months to a maximum of 10%) was a landmark event in the internationalisation of India's domestic bond market.

India was added at 1% weight in June 2024, reaching its maximum 10% weight by March 2025.
29 Indian FAR-designated G-secs were included in the JP Morgan GBI-EM suite.
Foreign inflows attributable to JP Morgan inclusion: approximately ₹75,000 crore (USD ~9 billion) through early 2026.
The JP Morgan inclusion demonstrated that FAR-designated G-secs could absorb large foreign inflows without causing currency or bond market disruption.

Connection to this news: The JP Morgan experience serves as both precedent and proof-of-concept: India's FAR bonds are operationally ready for index inclusion; the Bloomberg delay was specifically about tax frictions, now being resolved.

Capital Account Management and FPI Framework

India maintains a hybrid capital account: current account transactions are fully convertible, but capital account flows — including portfolio investment — are managed through a regulatory framework administered by SEBI and RBI. FPIs (registered under SEBI's FPI Regulations, 2019) are the primary channel for foreign fixed-income investment.

Withholding tax on interest income from G-secs: previously 5% for FPIs (under India-specific treaties, higher under domestic law at 20%); the removal brings the effective rate to 0% for FAR bonds.
Capital gains tax on G-sec trades: previously applicable to short-term and long-term gains depending on holding period; now removed for FAR-designated securities held by FPIs.
The ordinance route was used to give the change immediate retrospective effect from April 1, 2026, providing FPIs with certainty for the current financial year.
RBI's complementary measures include streamlining fund registration timelines and improving settlement infrastructure in coordination with CCIL (Clearing Corporation of India Limited).

Connection to this news: Tax removal alone is necessary but not sufficient for Bloomberg inclusion — the government and RBI have paired the fiscal change with operational improvements (settlement, registration) to address the full basket of concerns Bloomberg flagged in January 2026.

Key Facts & Data

Tax removed: capital gains tax and withholding tax on interest income for FPIs on FAR-designated G-secs, effective April 1, 2026.
Implementation mechanism: ordinance (June 2026).
Bloomberg Global Aggregate Index AUM tracked: estimated USD 3–4 trillion.
Projected inflows from Bloomberg inclusion: USD 20–25 billion.
Estimated Bloomberg index weight for India: 7–10%.
JP Morgan GBI-EM inclusion: June 28, 2024; maximum weight reached: 10% (by March 2025).
FPI inflows via FAR post JP Morgan inclusion: approximately ₹75,000 crore (~USD 9 billion).
FAR introduced: March 2020 by RBI.
Bloomberg deferral: January 2026 — reasons cited: withholding tax, settlement delays, fund registration, trading automation gaps.
FAR expansion (June 2026): all new 15-, 30-, 40-year G-secs; sovereign green bonds (5–40 year maturities).
India's sovereign credit rating: BBB- (Fitch, S&P) / Baa3 (Moody's) — investment grade, meeting Bloomberg's basic eligibility threshold.