Govt. lists Bill to replace FII tax exemption Ordinance

1. At a Glance

• Government to table a Bill in the Monsoon Session 2026 of Parliament to replace the Income-tax (Amendment) Ordinance, 2026, which exempted Foreign Institutional Investors (FIIs) and the Bank for International Settlements (BIS) from tax on income from Government Securities (G-Secs) [S1][S4].
• Tests the Prelims-relevant Ordinance-making power (Article 123) and the Mains-relevant theme of using tax incentives to attract foreign capital into India's sovereign debt market [S4].
• Directly linked to India's push for FPI/FII participation in G-Secs, following inclusion of Indian bonds in global bond indices [S3].

2. Why in the News

• The Government listed a Bill for introduction in the Monsoon Session of Parliament (2026) to replace the June 2026 Ordinance that gave the tax exemption, since an Ordinance under Article 123 lapses unless replaced by an Act within the constitutionally prescribed period [S5].
• The original Income-tax (Amendment) Ordinance, 2026 was promulgated by the President on 5 June 2026 [S4].

3. Background & Evolution

• 5 June 2026: President promulgates the Income-tax (Amendment) Ordinance, 2026, exempting FIIs and BIS from tax on (i) interest on G-Secs and (ii) capital gains from sale/exchange/transfer of such G-Secs [S4][S5].
• Exemption made effective for income arising on or after 1 April 2026 [S1].
• Move follows earlier reforms expanding foreign participation in G-Secs, including India's inclusion in global bond indices, which increased FPI/FII interest in the domestic debt market [S3].
• Monsoon Session 2026: Government lists a Bill to convert/replace the Ordinance into a permanent Act, as required under Article 123 of the Constitution [S5].

4. Core Static Facts

5. Multi-Dimensional Analysis

Economic - Aims to boost foreign capital inflows into India's sovereign debt market by removing tax friction on FII/BIS G-Sec investments [S3]. - Reduces cost of government borrowing by widening the FII investor base for G-Secs. - Foregone tax revenue is a trade-off against expected gains from deeper, more liquid bond markets.

Legal / Constitutional - Tests the Article 123 Ordinance mechanism: an Ordinance must be replaced by an Act of Parliament (or lapse) within six weeks of Parliament reassembling. - The Bill converts a temporary executive instrument into a permanent statutory amendment to the Income-tax Act, 1961.

Geopolitical / Strategic - Signals India's competitive positioning to attract institutional investors like BIS (an international financial institution) alongside private FIIs, strengthening India's integration with global bond markets [S1].

Administrative / Governance - Reflects the standard legislative sequence: Ordinance (urgent executive action) → Bill (parliamentary ratification) → Act, ensuring continuity without a compliance gap for investors.

6. Recent Developments (last 12-18 months)

• 5 June 2026: Income-tax (Amendment) Ordinance, 2026 promulgated exempting FIIs/BIS from tax on G-Sec interest and capital gains [S4].
• 17 July 2026 (reported): Government lists Bill in Monsoon Session to replace the June Ordinance [S5].

7. Prelims Hooks

• The Income-tax (Amendment) Ordinance, 2026 was promulgated on 5 June 2026 [S4].
• It exempts FIIs and the Bank for International Settlements (BIS) from tax on G-Sec income [S1][S4].
• Exemption covers both interest income and capital gains from sale/exchange/transfer of government securities [S5].
• Exemption effective for income arising on or after 1 April 2026 [S1].
• Pre-exemption LTCG rate on G-Secs for FIIs was 12.5%; STCG up to 30%; interest taxed at 20% [S1].
• Ordinances are issued by the President under Article 123 of the Constitution.
• An Ordinance must be replaced by a Bill/Act in Parliament (here, the Monsoon Session 2026) or it lapses [S5].
• BIS (Bank for International Settlements) is an international financial institution, not an Indian regulatory body — often confused with RBI or SEBI.
• The Bill amends the Income-tax Act, 1961.

8. Mains Relevance

• GS-II: Parliament — Ordinance-making power of the President (Article 123), legislative process (Ordinance-to-Bill conversion).
• GS-III: Indian Economy — mobilisation of resources, capital markets, foreign capital inflows, government borrowing programme.
• Possible question stems: 1. "Discuss the constitutional provisions governing the Ordinance-making power of the President. Examine recent instances, such as the Income-tax (Amendment) Ordinance, 2026, in this context." 2. "Examine the rationale and implications of exempting foreign institutional investors from capital gains tax on government securities for India's debt market and fiscal position." 3. "How do international bond index inclusion and tax incentives interact to shape foreign portfolio investment in India's sovereign debt market?"

9. Related Topics to Study Next

• Article 123 & 213 — Ordinance-making powers of President/Governor — directly tested by this Bill's origin.
• FPI/FII regulatory framework (SEBI) — to distinguish FII taxation from broader FPI regulation.
• India's inclusion in global bond indices (JP Morgan GBI-EM, Bloomberg) — the backdrop driving foreign G-Sec demand.
• Capital Gains Tax regime under Income-tax Act, 1961 — LTCG/STCG classification and rates.
• Fully Accessible Route (FAR) for G-Secs (RBI) — the channel enabling unrestricted FPI investment in specified G-Secs.
• Bank for International Settlements (BIS) — its role as "central bank of central banks."
• Fiscal deficit financing and government borrowing programme — how foreign G-Sec demand affects yields and borrowing costs.

10. Common Errors / Trap Areas

• Do not confuse BIS (Bank for International Settlements) with the World Bank or IMF — BIS is a distinct Basel-based institution for central bank cooperation.
• Do not confuse FII with FDI — this exemption applies to portfolio/institutional investment in debt (G-Secs), not direct investment.
• The exemption applies specifically to Government Securities, not to corporate bonds or equities.
• Remember the sequence: Ordinance (June 2026) → Bill (Monsoon Session 2026) — the Bill does not create a new exemption; it replaces/ratifies the existing Ordinance.
• Effective date of exemption (1 April 2026) is earlier than the Ordinance's promulgation date (5 June 2026) — a retrospective-application trap.

11. Sources

• [S1] FII tax exemption FAQs: Key income-tax changes, impact and rules explained — https://upstox.com/news/personal-finance/tax/fii-tax-exemption-faqs-key-income-tax-changes-impact-and-rules-explained/article-194878/ — (tier: 4)
• [S2] FREQUENTLY ASKED QUESTIONS (FAQs) ON FIIs EXEMPTION, PIB — https://static.pib.gov.in/WriteReadData/specificdocs/documents/2026/jun/doc202665884001.pdf — (tier: 1)
• [S3] Reforms to Expand Foreign Participation in G-Secs, PIB — https://www.pib.gov.in/FactsheetDetails.aspx?id=150624&NoteId=150624&ModuleId=16&reg=48&lang=2 — (tier: 1)
• [S4] Govt issues ordinance to exempt FIIs from capital gains tax on Government Securities — https://www.aninews.in/news/business/govt-issues-ordinance-to-exempt-fiis-from-capital-gains-tax-on-government-securities20260605105431/ — (tier: 4)
• [S5] Govt. lists Bill to replace FII tax exemption Ordinance, The Hindu Business Line — https://www.thehindu.com/todays-paper/2026-07-17/th_chennai/articleGBCG8TC54-15473728.ece — (tier: 4)