India's bond tax exemptions set to boost foreign debt inflows and global index inclusion bid

The Union Government promulgated the Income-tax (Amendment) Ordinance, 2026 on June 5, 2026, exempting eligible foreign investors from capital gains tax and ...

What Happened

The Union Government promulgated the Income-tax (Amendment) Ordinance, 2026 on June 5, 2026, exempting eligible foreign investors from capital gains tax and withholding tax on interest income from Indian government bonds, effective April 1, 2026.
The tax relief applies to government securities held through the Reserve Bank of India's Fully Accessible Route (FAR), the designated channel for unrestricted foreign investment in specified Indian bonds.
Following the announcement, foreign portfolio investors (FPIs) invested approximately ₹8,795 crore in FAR-route government securities within days of the ordinance.
The move directly targets India's stalled bid for inclusion in the Bloomberg Global Aggregate Index — postponed in January 2026 partly over tax and operational friction for foreign investors.
India's government bonds were already included in JPMorgan's Government Bond Index–Emerging Markets (GBI-EM) from June 2024; the Bloomberg index inclusion would be a significantly larger milestone, as the Bloomberg index is tracked by an estimated $2.5–3 trillion in global funds.

Static Topic Bridges

Fully Accessible Route (FAR) for Government Securities

The Fully Accessible Route (FAR) was introduced by the Reserve Bank of India in March 2020 to allow non-resident investors to purchase specified Indian government securities (G-Secs) without any quantitative limit on their holdings. Before FAR, foreign investment in G-Secs was constrained by aggregate investment ceilings.

FAR securities are specific Central Government securities designated by the RBI; as of 2024, 23 bonds with approximately $330 billion equivalent outstanding were FAR-eligible.
Non-resident investors, including FPIs and non-resident Indians, can invest in FAR bonds without limit, unlike the general FPI debt route which has caps.
FAR bonds are the eligible pool used for India's inclusion in global bond indices such as JPMorgan's GBI-EM.
The FAR framework is administered under the Foreign Exchange Management Act (FEMA), 1999, and RBI's Master Directions on debt investment.

Connection to this news: Removing the tax friction on FAR-route bonds directly increases their attractiveness to global passive funds that track indices and cannot absorb tax drag in their mandates.

Global Bond Index Inclusion and Its Significance

Global bond indices — most notably JPMorgan's Government Bond Index–Emerging Markets (GBI-EM) and Bloomberg's Global Aggregate Index — serve as benchmarks for trillions of dollars of fixed-income funds worldwide. A country's inclusion prompts passive and active funds tracking these indices to automatically allocate capital to its government bonds.

India's inclusion in JPMorgan's GBI-EM commenced June 28, 2024, with a weight starting at 1% per month, reaching the 10% cap by March 2025, expected to draw approximately $23.6 billion in inflows.
The Bloomberg Global Aggregate Index is tracked by an estimated $2.5–3 trillion in global funds, vastly larger than the ~$236 billion linked to the JPMorgan index.
Bloomberg postponed India's inclusion in January 2026 citing tax treatment and operational issues for foreign investors — the exact friction the June 2026 ordinance addresses.
Index inclusion leads to capital inflows that help finance the fiscal deficit, deepen the government securities market, and can support a stronger rupee.

Connection to this news: The tax exemption directly responds to the stated barriers Bloomberg cited, reopening India's bid for the much larger Bloomberg index and the associated passive capital inflows.

Ordinance-Making Power Under the Constitution

The Union Government used the ordinance route — rather than a Parliamentary amendment — to deliver the tax change. Under Article 123 of the Constitution, the President of India may promulgate ordinances when Parliament is not in session, if there is an immediate necessity for action. Ordinances have the same force as Acts of Parliament but must be laid before Parliament and either approved or allowed to lapse within six weeks of reassembly.

Article 123 empowers the President to issue ordinances during recess of Parliament.
An ordinance ceases to operate six weeks after Parliament reassembles unless approved by both Houses, or if both Houses pass a resolution disapproving it.
Ordinances can amend tax laws, as in the present case amending the Income-tax Act, 1961.
The Supreme Court in D.C. Wadhwa v. State of Bihar (1987) held that re-promulgation of ordinances without placing them before the legislature is a fraud on the Constitution.

Connection to this news: The speed of the ordinance route enabled the tax benefit to take effect quickly, signalling urgency to foreign investors and global index administrators, rather than waiting for the Parliamentary budget cycle.

Key Facts & Data

Ordinance: Income-tax (Amendment) Ordinance, 2026 — promulgated June 5, 2026
Tax relief effective from: April 1, 2026 (retrospective)
FPI inflows post-ordinance (within days): ₹8,795 crore in FAR bonds
FAR route established by: RBI, March 2020
JPMorgan GBI-EM inclusion date: June 28, 2024 (max weight 10%, reached by March 2025)
Estimated JPMorgan-linked inflows: ~$23.6 billion
Bloomberg Global Aggregate Index — funds tracked: $2.5–3 trillion (vs ~$236 billion for JPMorgan EM index)
Bloomberg India inclusion: postponed January 2026 citing tax and operational issues
Constitutional basis for ordinance: Article 123 (Union) / Article 213 (States)