Modi seeks sweeping tax cuts for global funds
The government introduced the Taxation and Other Laws (Amendment) Bill, 2026 in the Lok Sabha, proposing sweeping tax relief for foreign institutional and portfolio investors along with offshore investment funds
The Bill seeks to replace the Income-tax (Amendment) Ordinance, 2026 (promulgated 5 June 2026), which had exempted Foreign Institutional Investors (FIIs) and the Bank for International Settlements from tax on interest and capital gains earned on Indian government securities, with retrospective effect from 1 April 2026
The Bill also proposes relaxing eligibility conditions for offshore investment funds managed by India-based fund managers, aimed at strengthening India's position as a global fund-management hub
The reforms are framed as a response to intensifying international competition among financial centres to attract mobile investment capital
FII/FPI Taxation Under Section 115AD
Section 115AD of the Income-tax law provides a special concessional tax regime for Foreign Institutional Investors (a term the tax statute still uses, though SEBI regulations now classify such entities as Foreign Portfolio Investors or FPIs). It taxes income earned by FIIs/FPIs from securities — other than income already covered under a specific exemption — separately from their other income, at rates lower than those applicable to ordinary non-resident taxpayers.
Key Details
- Under Section 115AD, short-term capital gains and interest/dividend income from securities held by FIIs/FPIs are taxed at 20% (subject to applicable surcharge and cess); long-term capital gains on listed equity are taxed under the separate Section 112A regime
- FIIs/FPIs are exempt from indexation benefits and foreign-exchange fluctuation adjustments available to resident taxpayers on such gains
- FPIs are registered and categorised (Category I and Category II) under the SEBI (Foreign Portfolio Investors) Regulations, 2019, which replaced the earlier FII/QFI regulatory framework
- No Securities Transaction Tax (STT)-linked concessional capital gains rate applies to debt securities such as government securities, unlike listed equity
The current Bill's relief for foreign investors in government securities operates alongside — but distinct from — the Section 115AD framework, which continues to govern how FIIs/FPIs are taxed on their broader Indian securities portfolio, including equities and corporate bonds not covered by the new sovereign-debt exemption.
Withholding Tax on Government Securities — Section 194LD and the 2026 Exemption
Section 194LD provides for tax deduction at source (TDS) on interest paid to FIIs/FPIs and Qualified Foreign Investors on investments in government securities and rupee-denominated corporate bonds. Its concessional 5% rate applied only up to 1 July 2023; interest accruing thereafter reverted to the standard 20% rate under Section 115AD, absent a specific exemption — the friction the June 2026 Ordinance and this Bill are designed to remove entirely for government securities.
Key Details
- Concessional 5% withholding rate under Section 194LD applied to interest income up to 1 July 2023; the default rate since has been 20% under Section 115AD
- The Income-tax (Amendment) Ordinance, 2026 (5 June 2026) exempted FIIs and the Bank for International Settlements from both interest-income tax and capital gains tax on government securities, with retrospective effect from 1 April 2026, subject to prescribed reporting conditions
- The present Bill formalises this Ordinance into a permanent Act, since an Ordinance under Article 123 lapses six weeks after Parliament reassembles unless replaced by legislation
Before this reform, a foreign investor holding Indian government bonds faced both a withholding tax on interest and a capital gains levy on exit — costs that other emerging-market sovereign debt destinations increasingly do not impose, making the removal of this friction central to the Bill's stated goal of deepening foreign participation in India's bond market.
Global Tax Competition for Capital — OECD Pillar Two and Offshore Fund Hubs
Jurisdictions worldwide compete to attract internationally mobile fund-management activity and portfolio capital through favourable tax regimes, even as the OECD/G20 Base Erosion and Profit Shifting (BEPS) "Pillar Two" framework seeks to set a floor under this competition for large multinational groups by imposing a 15% global minimum effective tax rate.
Key Details
- Pillar Two applies a 15% minimum effective tax rate to multinational enterprise groups with consolidated annual revenue exceeding €750 million; if a jurisdiction's effective rate falls below 15%, other jurisdictions may levy a "top-up tax"
- India, as a member of the OECD/G20 Inclusive Framework, has not yet enacted Pillar Two legislation; its headline corporate tax rate for domestic companies opting into the concessional regime under Section 115BAA is about 25.17% (inclusive of surcharge and cess), already above the 15% floor
- India's IFSC at GIFT City, Gujarat, offers offshore-fund operating costs of roughly $5,000–10,000 a year, compared with $30,000–40,000 typically incurred operating from Singapore or Mauritius, positioning it as a lower-cost alternative fund-management jurisdiction
- Pillar Two chiefly constrains corporate income tax competition for large MNE groups; portfolio-investor-facing measures like FII/FPI capital gains and withholding tax relief fall outside its scope, leaving room for the kind of investor-specific relief in this Bill
While Pillar Two narrows the scope for jurisdictions to compete on headline corporate tax rates for large multinationals, India's relief for FIIs, FPIs and offshore funds targets a different lever — portfolio and fund-management taxation — where competition among financial centres (Singapore, Mauritius, Ireland, Luxembourg, and now GIFT City) remains largely unconstrained by the global minimum tax framework.
- Section 115AD tax rate on FII/FPI short-term capital gains and interest/dividend income from securities: 20% (plus surcharge and cess)
- Section 194LD concessional withholding rate on G-Sec/bond interest: 5% (applicable only up to 1 July 2023); standard rate thereafter: 20% under Section 115AD
- Income-tax (Amendment) Ordinance, 2026: promulgated 5 June 2026; retrospective effect from 1 April 2026
- OECD Pillar Two global minimum effective tax rate: 15%, applicable to MNE groups with consolidated revenue above €750 million
- India's effective corporate tax rate under Section 115BAA (concessional regime): approximately 25.17%
- Approximate annual cost of operating an offshore fund from GIFT City IFSC: $5,000–10,000, versus $30,000–40,000 from Singapore or Mauritius
- SEBI (Foreign Portfolio Investors) Regulations, 2019 govern FPI registration and categorisation (Category I and II)