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- The Income-tax (Amendment) Ordinance, 2026,<\/a> scraps the 12.5% long-term capital gains tax and 20% withholding tax on G-sec interest for FPIs, effective April 1, 2026<\/li>\n
- The Fully Accessible Route expanded to include 15-, 30-, and 40-year G-secs and sovereign green bonds, widening the investable pool for global passive funds<\/li>\n
- RBI and finance ministry officials have confirmed active engagement with global index operators ahead of a mid-2026 review<\/li>\n
- Standard Chartered projects $5 billion in immediate FPI inflows, conditional on Euroclear settlement eligibility being resolved<\/li>\n
- FPIs have withdrawn a net \u20b92.47 lakh crore from Indian markets in 2026 so far, making this ordinance as much a capital account defence as an index play<\/li>\n<\/ul>\n
![\"FPI](\"https:\/\/trending.niftytrader.in\/wp-content\/uploads\/2026\/06\/FPI-BOND-TAX-SCRAPPED.webp\")
<\/a>FPI BOND TAX SCRAPPED\u2014NIFTYTRADER<\/figcaption><\/figure>\n
\nWhat the Ordinance Actually Does<\/h2>\n
India’s government, on June 5, 2026, issued the Income-Tax (Amendment) Ordinance, 2026, making four specific changes that directly affect foreign bond investors.<\/p>\n
It scraps the 12.5% long-term capital gains tax on G-secs held beyond 12 months by FPIs. It eliminates the 20% withholding tax on interest income from government securities. It extends full tax exemption to the Bank for International Settlements (BIS), subject to prescribed information disclosure. And it expands the Fully Accessible Route (FAR) to include 15-, 30-, and 40-year G-secs and sovereign green bonds, previously capped at 10-year tenors only. All provisions are effective retroactively from April 1, 2026.<\/p>\n
The FAR expansion is not a minor detail. Global passive funds managing long-duration bond portfolios need access to the 15\u201340 year curve. Without it, India’s investable pool was structurally too shallow for meaningful index weight allocation.<\/p>\n
\nThe Global Bond Index Review Happening Right Now<\/h2>\n
In January 2026, a major global aggregate bond index deferred India’s inclusion, committing explicitly to a mid-2026 update. Most market participants now expect that update this month. The June 5 ordinance, timed alongside the RBI’s MPC decision, is widely read as a direct policy submission ahead of that review window.<\/p>\n
India is being assessed for approximately 1% weight in the index. At that weight, index consultation documents estimated roughly $25 billion in passive rebalancing inflows spread over approximately 10 months.<\/p>\n
RBI and finance ministry officials have confirmed active engagement with global index operators. “We would be talking to them, there is regular engagement in any case,” a senior government official told Economic Times, adding that major concerns have been considerably addressed.<\/p>\n
That dwarfs what the JP Morgan GBI-EM inclusion delivered. India’s June 2024 entry into the JP Morgan index generated approximately \u20b92,21,450 crore ($25 billion) in inflows over 10 months, per IBEF data. The global aggregate index being reviewed is tracked by an estimated $2.5\u20133 trillion in passive assets, compared to roughly $236 billion linked to the JP Morgan index. A gap of more than 10x.<\/p>\n
Track live FPI flow data on NiftyTrader’s FII-DII Dashboard<\/a>\u00a0<\/strong><\/p>\n
\nWhere India Stands Across All Four Major Bond Indices<\/h3>\n
\n\n\n
\n \nIndex<\/th>\n Status<\/th>\n Date<\/th>\n<\/tr>\n<\/thead>\n \n JP Morgan GBI-EM<\/td>\n Included<\/td>\n June 2024<\/td>\n<\/tr>\n \n FTSE Russell Emerging Markets<\/td>\n Included<\/td>\n September 2024<\/td>\n<\/tr>\n \n Bloomberg EM Local Currency Govt<\/td>\n Included<\/td>\n January 2025<\/td>\n<\/tr>\n \n Bloomberg Global Aggregate<\/td>\n Under Review \u2014 mid-2026 update due<\/td>\n Deferred January 2026<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n Three of four major EM bond indices now include India. The fourth, the largest by passive assets, is the one still under review.<\/p>\n
\nThe Settlement Gap That Still Isn’t Solved<\/h2>\n
When the global aggregate index deferred India’s inclusion in January 2026, it had specifically cited infrastructure bottlenecks related to non-automated trading workflows and complex fund registration processes, in addition to settlement concerns. The June 5 ordinance directly addresses the tax-linked friction. Trading workflow and fund registration issues have not been formally declared resolved.<\/p>\n
Parul Mittal Sinha, Head of Markets (India and South Asia) at Standard Chartered Bank, said the tax exemptions make Indian G-secs compelling for a far wider universe of foreign buyers. Her bank projects $5 billion in near-term FPI inflows in direct response to the ordinance.<\/p>\n
The condition attached to that projection is critical: inflows are expected “especially if these bonds are made eligible for Euroclear settlement.” Euroclear settlement eligibility for Indian FAR bonds remains unresolved, with no official timeline announced.<\/p>\n
The global aggregate index serves a broader and more operationally diverse investor base than EM-specific indices. Tax friction was one leg of the problem. Trading infrastructure and settlement are the other two, and both are still standing.<\/p>\n
\nWhy the BIS Exemption Matters More Than It Looks<\/h2>\n
The BIS angle is being underreported. The Basel-based institution holds tax-free status on sovereign debt across nearly every market it operates in, making it unusual for a country to tax its G-sec investments at all. By extending full exemption to BIS under the ordinance, India has removed a structural anomaly.<\/p>\n
Government officials told Economic Times that BIS-related flows are included in the $7\u201311 billion near-term inflow estimate. BIS participates primarily through large, sustained positions, not tactical trades, making it exactly the kind of durable, patient capital this ordinance targets.<\/p>\n
\nInflow Projections at a Glance<\/h2>\n
\n\n\n
\n \nTrigger<\/th>\n Projected Inflow<\/th>\n Source<\/th>\n<\/tr>\n<\/thead>\n \n Immediate FPI response to ordinance<\/td>\n ~$5 billion<\/td>\n Standard Chartered<\/td>\n<\/tr>\n \n Near-term inflows including BIS<\/td>\n $7\u201311 billion<\/td>\n Government officials (ET)<\/td>\n<\/tr>\n \n Global Aggregate index inclusion (1% weight)<\/td>\n ~$25 billion over 10 months<\/td>\n Index Services consultation<\/td>\n<\/tr>\n \n JP Morgan GBI<\/a>-EM inclusion (benchmark)<\/td>\n \u20b92,21,450 crore (~$25 billion)<\/td>\n IBEF<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n
\nThe Capital Account Pressure Behind This Move<\/h2>\n
The ordinance is not just about index inclusion. It is a direct response to a capital account under sustained pressure.<\/p>\n
FPIs have withdrawn a net \u20b92.47 lakh crore from Indian markets in 2026 so far, more than double the \u20b91.04 lakh crore pulled out across all of 2025. As of May 12, 2026, FPIs held \u20b93.75 trillion in Indian G-secs, just 3.34% of the total market, one of the lowest foreign ownership ratios among major EM economies. The RBI sold a net $53.13 billion in the spot forex market in FY26 to defend the rupee, a record annual intervention, as forex reserves declined from approximately $725 billion to $681 billion since the West Asia conflict began.<\/p>\n
\nBottom Line<\/h2>\n
India has cleared one of the three specific objections the global index review raised in January 2026 \u2014 the tax-linked friction. The remaining objections, trading workflow automation, fund registration complexity, and Euroclear settlement eligibility, have not been formally declared resolved. The mid-2026 index update expected this month will determine whether removing the tax wall was enough or whether the infrastructure walls are still the ones India hasn’t climbed.<\/p>\n