Government securities tax rules: How are interest income and capital gains taxed for resident and foreign investors?

Government securities (G-Secs) are debt instruments issued by the Central and State governments to raise funds for public expenditure and other financial requirements. Investors who purchase these securities lend money to the government and receive interest, where applicable, along with repayment of the principal at maturity.

The tax treatment of G-Secs depends on the type of security, the investor’s residential status, and the nature of the income earned. Here’s what you need to know.

How is income from government securities taxed for Indian investors?

Indian investors may earn returns through interest payments or profits from selling securities at a higher price. The tax treatment varies across different instruments.

Sovereign Gold Bonds (SGBs)

• Bonds purchased during the original issue: Capital gains on redemption at maturity after 8 years are exempt from tax for original subscribers with effect from 1 April 2026.
• Bonds purchased in the secondary market: SGBs purchased from the secondary market do not qualify for the capital gains tax exemption, even if held until maturity. Gains on sale after more than 12 months are taxed at 12.5%, while gains on sale within 12 months are taxed at the applicable income tax slab rates.
• Interest income: The annual interest earned on SGBs is taxable according to the investor’s applicable income tax slab.

Treasury bills (T-bills)

T-bills are issued at a discount and redeemed at their face value. The difference between the purchase price and redemption value represents the investor’s gain. This income is treated as short-term capital gains (STCG) and taxed under the applicable slab rates.

What is the tax exemption for foreign investors in G-Secs?

On 5 June 2026, the Ministry of Finance announced an income tax exemption for FPIs on interest income and capital gains arising from investments in government securities.

The exemption applies to both interest income and capital gains arising on or after 1 April 2026.

How can foreign investors claim the exemption?

The Central Board of Direct Taxes (CBDT), through the Income-tax (Seventh Amendment) Rules, 2026, notified on 19 October 2026, introduced Rule 281A, according to the Gazette notification.

Under this provision, eligible taxpayers seeking the exemption under Schedule IV, entries 13D and 13E, must furnish information in Form 173A.

The form requires details such as the investor’s name, country of residence, residential or headquarters address, Permanent Account Number (PAN), Tax Identification Number (TIN), SEBI registration number as an FPI/FII, and the tax year for which the exemption is claimed.

Investors must also report details of the exempt income, including the International Securities Identification Number (ISIN) and the type of government security held, such as Treasury bills, fixed-rate bonds, floating-rate bonds, State Development Loans, or other eligible securities.

Disclaimer: This is for informational purposes only. Investors should consult a qualified tax professional for advice specific to their circumstances.