The Central Board of Direct Taxes (CBDT) notified Form 173A on 19 October 2026 for claiming tax exemption on interest and capital gains from government securities. The CBDT issued the new form through Notification No. 137/2026 under the Income-tax (Seventh Amendment) Rules, 2026. Only specified Foreign Institutional Investors (FIIs) and the Bank for International Settlements (BIS) can use it to claim exemption under Schedule IV entries 13D and 13E of the Income-tax Act, 2025.
What Is the CBDT Notification on Form 173A?
The CBDT notification dated 19 October 2026 makes Form 173A compulsory for claiming tax exemption on government securities under the Income-tax Act, 2025. Issued as Notification No. 137/2026, it inserts Rule 281A into the Income-tax Rules, 2026 and takes effect from the date of gazette publication.
The Central Board of Direct Taxes issued the notification in exercise of powers under Section 533 read with Section 11 and Schedule IV of the Income-tax Act, 2025. The file number of the notification is 370142/35/2026-TPL, and it was published as G.S.R. 901(E) in the Gazette of India. The Income-tax Rules, 2026, which this amendment changes, were first notified on 20 March 2026 through G.S.R. 198(E). Form 173A has been placed immediately after Form 173 in the Rules.
Legal Base: Income Tax Act 2025 and Schedule IV Entries 13D and 13E
The Income-tax Act, 2025 is the new direct tax law that replaced the six decade old Income-tax Act, 1961. Parliament passed the new Act in August 2025, the President gave assent on 21 August 2025, and it came into force on 1 April 2026. The new law contains 536 sections across 23 chapters and 16 schedules. It does not impose a fresh tax. It simplifies language and structure while keeping the earlier tax policy largely intact.
Schedule IV of the Income-tax Act, 2025 lists incomes that are not included in the total income of eligible non residents, foreign companies and certain other persons. In June 2026, the government first inserted entries 13D and 13E into this Schedule through the Income-tax (Amendment) Ordinance, 2026. The Ordinance was later replaced by law and the exemption applies retrospectively from 1 April 2026, which is the start of tax year 2026-27.
| Entry | Eligible Person | Income Covered | Condition |
|---|---|---|---|
| 13D | Foreign Institutional Investor as defined in Section 210(6)(a) | Interest on government security and capital gains from its sale, exchange or transfer | Furnishing of information in prescribed form and manner |
| 13E | Bank for International Settlements | Interest on government security and capital gains from its sale, exchange or transfer | Furnishing of information in prescribed form and manner |
Government security here carries the same meaning as in Section 2(f) of the Government Securities Act, 2006. The term covers instruments issued by the central and state governments, such as Treasury Bills, dated securities and State Development Loans. Rule 281A now prescribes Form 173A as that prescribed form. Without filing this form, the exemption under 13D or 13E cannot be claimed.
Filing and Reporting Framework for Form 173A
Form 173A under the Income-tax Rules, 2026 creates a uniform income tax e filing disclosure for all exemption claims on government securities under entries 13D and 13E. The claimant must report through the Income Tax Department e filing portal at incometax.gov.in for the tax year in which exemption is sought. The form has two parts. Part A captures the identity of the investor. Part B captures security wise holdings and exempt income.
Part A asks for full name, country of residence, complete address with building, street, locality, district, state and PIN or ZIP code, and address of headquarters where relevant. The claimant must also state the Permanent Account Number (PAN), which is the ten character tax identity issued by the Income Tax Department, the Tax Identification Number (TIN) in the country of residence, the SEBI registration number as Foreign Portfolio Investor or Foreign Institutional Investor, the tax year of claim, email ID and contact number with country code. For the Bank for International Settlements, the TIN and SEBI registration details are optional.
| Field in Part B | What the Claimant Must Report |
|---|---|
| ISIN | International Securities Identification Number, the unique 12 character code for each security issue |
| Type of security | Treasury Bills, fixed rate bonds, floating rate bonds, State Development Loans (SDLs) or others with details |
| Tenor | Original maturity period of the security |
| Value on 1 April | Total holding value at the start of the tax year |
| Purchases during the year | Value of securities bought during the tax year |
| Sale consideration | Amount received on sale during the tax year |
| Value on 31 March | Total holding value at the end of the tax year |
| Gross interest | Interest received or accrued during the tax year |
| Capital gains | Gains from sale, exchange or transfer during the tax year |
All amounts must be stated in Indian rupees unless the form permits otherwise. Details for each security must be repeated in the same format when more than one security is held. The form closes with a declaration by the principal officer that the information is true and matches Schedule IV entries 13D and 13E, along with date, place, signature and name.
Who Can Claim the Exemption?
Only two categories of investors can claim this exemption, and ordinary resident investors cannot use Form 173A. Entry 13D covers specified Foreign Institutional Investors, while entry 13E covers the Bank for International Settlements. Both must satisfy the disclosure condition in full before the Income Tax Department allows the relief.
A Foreign Institutional Investor is an overseas entity that invests in Indian securities under the framework overseen by the Securities and Exchange Board of India (SEBI). SEBI was set up in 1988, became a statutory body under the SEBI Act, 1992, and is headquartered in Mumbai. Many foreign investors now register as Foreign Portfolio Investors (FPIs), which is the current SEBI category that includes the earlier FII route. In market data, FII activity is often shown along with Domestic Institutional Investor (DII) activity. FII means buying and selling by overseas institutions, while DII means buying and selling by Indian institutions such as mutual funds, insurers and banks. The exemption under 13D is available only to the foreign investor defined in Section 210(6)(a) of the Income-tax Act, 2025, and not to domestic institutions or retail holders of government bonds.
The Bank for International Settlements is an international organisation for central banks. The BIS was established in 1930 and is headquartered in Basel, Switzerland, with representative offices in Hong Kong and Mexico City. It is owned by 63 central banks that together account for about 95 percent of world GDP, and it acts as a bank for central banks. The Reserve Bank of India is a member of the BIS. Because of this central banking role, the BIS receives a separate entry in 13E, with simpler identity disclosure in Form 173A.
What Is CBDT and How Are Foreign Investors Taxed in India?
The Central Board of Direct Taxes is the apex body for direct taxes in India. CBDT functions as part of the Department of Revenue in the Ministry of Finance and administers direct tax law through the Income Tax Department. It was created as a statutory authority under the Central Board of Revenue Act, 1963, after the old Central Board of Revenue was split on 1 January 1964 into the CBDT and the body now called the Central Board of Indirect Taxes and Customs (CBIC). The CBDT is headed by a Chairperson with six members and handles policy, planning and collection of direct taxes such as income tax and corporation tax.
| Point | CBDT | CBIC |
|---|---|---|
| Full form | Central Board of Direct Taxes | Central Board of Indirect Taxes and Customs |
| Taxes handled | Income tax, corporation tax and other direct taxes | GST, customs duty, central excise and other indirect taxes |
| Parent department | Department of Revenue, Ministry of Finance | Department of Revenue, Ministry of Finance |
| Field arm | Income Tax Department | GST and Customs field formations |
Foreign investors in India normally pay tax in India on income earned here. Interest on debt and capital gains on sale of securities are generally taxable under domestic law, subject to treaty relief where a Double Taxation Avoidance Agreement applies. The new entries 13D and 13E create a focused exception for government securities. Interest on government securities and capital gains from their sale, exchange or transfer are now fully exempt for eligible FIIs and the BIS from tax year 2026-27, but only when Form 173A is furnished. Without that disclosure, the normal tax rules continue to apply.
Capital Gains and Interest Exemption on Government Securities
A government security is a loan instrument issued by the central government or a state government to borrow from the market. Common types include Treasury Bills, which are short term instruments, dated fixed rate bonds, floating rate bonds where the coupon changes with a benchmark, and State Development Loans (SDLs) issued by states. Investors earn in two ways. They receive interest at regular intervals, and they may earn capital gains when they sell the bond at a higher price than the purchase cost. Capital gains simply mean profit from transfer of a capital asset.
Under the new framework, both streams are exempt for eligible claimants. Gross interest received or accrued during the tax year is excluded from total income, and capital gains from sale, exchange or transfer are also excluded. The relief is narrow. It does not cover corporate bonds, equities or other assets, and it does not extend the exemption to resident individuals, domestic mutual funds or other foreign entities outside 13D and 13E. Every rupee of exempt interest and every gain must be linked to a specific ISIN in Part B of Form 173A, with opening and closing values to allow cross checking.
This design links a tax benefit to full traceability. The Income Tax Department can match purchases, sales, interest and closing holdings for each security. That reduces false claims and brings foreign holdings of sovereign debt into a clear reporting grid.
Significance and Way Forward
The CBDT move completes the link between the exemption promise and its verification method. The Income-tax Act, 2025 granted the relief from 1 April 2026, and Form 173A now tells investors exactly what data will prove the claim. Standard reporting lowers disputes, speeds up assessment and gives the government reliable data on foreign participation in sovereign debt. Deeper foreign participation can support demand for government bonds at a time when the centre and states borrow heavily to fund infrastructure and welfare.
For eligible investors, the next step is practical compliance. They must obtain or quote PAN, maintain ISIN wise records from 1 April to 31 March, reconcile sale consideration with interest accruals, and ensure the principal officer certifies the form before filing. The Income Tax Department is expected to integrate Form 173A checks into return processing and information matching through the Annual Information Statement framework. Clear and timely filing will decide whether the exemption survives scrutiny.
Key Takeaways
- The CBDT notified Form 173A on 19 October 2026 through Notification No. 137/2026 under the Income-tax (Seventh Amendment) Rules, 2026.
- Rule 281A makes Form 173A compulsory for claiming exemption under Schedule IV entries 13D and 13E of the Income-tax Act, 2025.
- Entry 13D covers Foreign Institutional Investors and entry 13E covers the Bank for International Settlements for interest and capital gains on government securities.
- The Income-tax Act, 2025 replaced the Income-tax Act, 1961 and came into force on 1 April 2026.
- The Bank for International Settlements was established in 1930 and is headquartered in Basel, Switzerland.
- The Central Board of Direct Taxes is a statutory body under the Central Board of Revenue Act, 1963 and functions under the Department of Revenue in the Ministry of Finance.
