In a significant step towards deepening India's capital markets and enhancing the country's attractiveness as a global investment destination, the Union Minister for Finance and Corporate Affairs, in the Union Budget for FY 2026–27, announced a series of measures aimed at liberalising foreign portfolio investment norms and facilitating greater participation by overseas investors in both equity and debt markets.

These reforms encompass three key areas: 

(i) expansion of access to the Portfolio Investment Scheme (PIS) for individual Persons Resident Outside India (PROIs), 

(ii) further liberalisation of the Government Securities (G-Sec) market through expansion of the Fully Accessible Route (FAR) and relaxation of investment restrictions, and 

(iii) introduction of a tax exemption regime for foreign investors investing in Government Securities.

REFORMS

i. Liberalisation of the Portfolio Investment Scheme for Persons Resident Outside India

One of the notable announcements in the Union Budget FY 2026–27 was the decision to permit individual Persons Resident Outside India (PROIs) to invest in equity instruments of listed Indian companies through the Portfolio Investment Scheme (PIS).

Historically, the PIS framework was available only to Non-Resident Indians (NRIs) and Overseas Citizens of India (OCIs). Foreign individuals who did not fall within these categories were generally required to access Indian capital markets through alternative regulatory routes.

The Government has now broadened the scope of the PIS framework by extending eligibility to individual PROIs. Simultaneously, investment limits under the scheme have been substantially enhanced. The permissible investment limit for an individual PROI in any listed Indian company has been increased from 5% to 10% of the company's paid-up equity capital. Further, the aggregate/combined investment limit for all individual PROIs has been increased from 10% to 24%.

To operationalise this policy announcement, the Department of Economic Affairs has notified the Foreign Exchange Management (Non-Debt Instruments) (Third Amendment) Rules, 2026.

The reform seeks to leverage the existing onboarding infrastructure available for NRI and OCI investors, thereby reducing procedural complexities and compliance requirements. By widening investor eligibility and simplifying market access, the Government aims to attract a broader base of relatively stable foreign individual investors and support sustained foreign capital inflows into Indian equity markets.

ii. Expansion of the Fully Accessible Route for Government Securities

Beyond equity markets, the Government has announced a significant expansion of the investment framework applicable to Government Securities.

Foreign investors currently access Indian Government Securities through two principal routes: the General Route and the Fully Accessible Route (FAR). While the General Route is subject to various investment restrictions and quantitative limits, FAR permits unrestricted investment in specified Government Securities.

Recognising the strong interest shown by foreign investors in FAR-eligible securities, the Government has expanded the list of securities covered under the FAR framework. The revised framework now includes:

• New issuances of 15-year Government Securities;

• New issuances of 30-year Government Securities;

• New issuances of 40-year Government Securities; and

• Sovereign Green Bonds (SGrBs) issued in FAR-eligible maturities.

The inclusion of longer-tenor securities is expected to broaden investment opportunities across the sovereign yield curve and attract long-duration investors such as pension funds, insurance companies and sovereign wealth funds.

In addition, the Government has relaxed several investment restrictions applicable under the General Route. The following restrictions have been removed:

• Short-term investment limits;

• Concentration limits; and

• Security-wise investment limits.

However, the overall quantitative investment limits remain unchanged at 6% of the outstanding stock of Central Government Securities and 2 % of the outstanding stock of State Government Securities (SGSs).

iii. Tax Exemption for Foreign Investors in Government Securities

Complementing the market-access reforms, the Government has also introduced a significant tax incentive for foreign investors investing in Government Securities.

Prior to the latest reform, Foreign Institutional Investors (FIIs), including SEBI-registered Foreign Portfolio Investors (FPIs), were taxed under Section 210 of the Income-tax Act, 2025. Income derived from investments in Government Securities was subject to taxation in India.

Recognising the importance of a competitive tax framework in attracting global capital, the Government has now introduced a full tax exemption for FPIs and FIIs investing in Government Securities.

The comparative position is set out below:

For purposes of determining the character of gains, the classification of capital assets remains unchanged:

The exemption applies to income arising on or after 1 April 2026 and has been introduced through the Income-tax (Amendment) Ordinance, 2026.

IMPLICATIONS FOR INDIA'S FINANCIAL MARKETS

The recent reforms represent a significant advancement in India's efforts to deepen its capital markets and strengthen integration with global financial systems. By expanding access to the Portfolio Investment Scheme (PIS) for individual Persons Resident Outside India (PROIs), broadening the scope of the Fully Accessible Route (FAR), easing investment restrictions for Foreign Portfolio Investors (FPIs), and introducing tax exemptions for investments in Government Securities (G-Secs), the Government has substantially enhanced the attractiveness of Indian financial markets for foreign investors.

CONCLUSION

These measures are expected to diversify and expand the foreign investor base across both equity and debt markets. Greater participation by long-term institutional investors, including pension funds, insurance companies, and sovereign wealth funds, can provide a stable source of capital and reduce reliance on short-term flows. Increased foreign investment in G-Secs is also likely to improve market liquidity, enhance price discovery, and contribute to the development of a smoother and more efficient sovereign yield curve.

From a broader economic perspective, sustained foreign capital inflows can support financing requirements for infrastructure, manufacturing, urban development, and climate-related initiatives. The reforms are also expected to strengthen foreign exchange inflows, improve market resilience, and support India's objective of achieving greater inclusion in global bond and investment indices. Collectively, these initiatives reinforce India's position as an increasingly attractive destination for long-term international capital.

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