MUMBAI, Nov 2: The Securities and Exchange Board of India (SEBI) has recommended the removal of long-term capital gains (LTCG) tax on investments made by foreign investors in Indian equities, in a move aimed at improving the country’s attractiveness as an investment destination and encouraging overseas participation in domestic financial markets.
According to people familiar with the development, the market regulator has submitted proposals to the government seeking changes in the existing taxation framework. The recommendations also include providing relief to domestic mutual fund investors by exempting certain switches between investment schemes from long-term capital gains taxation.
The proposals come at a time when Indian equity markets have struggled to match the performance of several other emerging economies. Foreign portfolio investors have continued to withdraw substantial amounts from domestic stocks, raising concerns about the country’s ability to maintain consistent overseas investment flows.
The recommendations are part of SEBI’s pre-Budget representations submitted ahead of the Union Budget scheduled for February 2027. However, the suggestions are not binding on the government, which will take the final decision after examining their possible impact on revenue collections, investment activity and the broader economy.
Reuters+1
Under the existing taxation structure, foreign investors are required to pay a 12.5 per cent long-term capital gains tax on eligible securities held for more than one year. Short-term capital gains on equity investments held for shorter periods attract a 20 per cent tax. Investors are also subject to securities transaction tax and applicable taxes on dividend income.
SEBI believes that the overall tax burden and transaction related expenses have become important considerations for international investors assessing investment opportunities in India.
The regulator has reportedly held several discussions with overseas investors over the past two years to understand the reasons behind persistent withdrawals from Indian equities. Taxation has emerged as one of the major concerns raised during these consultations.
Foreign investors have also pointed towards the cost of executing transactions in India, which SEBI has described as relatively high compared with several other markets. Reducing the tax burden could therefore improve the overall investment environment and encourage international funds to reconsider their exposure to Indian stocks.
The withdrawal of overseas capital has become a significant concern for the domestic market. Foreign investors have sold Indian equities worth approximately USD 31 billion during 2026, marking a record level of annual outflows, according to the information cited in the report.
The selling pressure has coincided with a period of relatively weak performance in benchmark indices. India’s Nifty 50 has declined around 4.8 per cent over the past two years, while the MSCI emerging markets index has gained approximately 40 per cent during the same period.
This difference has raised questions about the competitiveness of Indian equities compared with other emerging investment destinations.
Market participants believe that taxation reforms could help improve investor confidence, particularly at a time when global fund managers are reassessing their allocations across developing economies. A reduction in capital gains taxation may improve post-tax returns and make Indian securities more attractive to international investors.
Brokerage firm IIFL has estimated that removing the capital gains tax could improve foreign investors’ returns by approximately 2.3 percentage points. Such an improvement could influence investment decisions, although actual inflows would continue to depend on market valuations, corporate earnings, currency movements and global economic conditions.
Reuters
Apart from foreign investors, SEBI has also proposed changes intended to benefit domestic mutual fund investors.
Under the suggested arrangement, investors switching from one mutual fund scheme to another after holding their units for more than a year could receive an exemption from long-term capital gains taxation, provided the transaction meets the proposed conditions.
At present, switching between mutual fund schemes is generally treated as a redemption from the existing scheme followed by a fresh investment in another scheme. This can create a tax liability when the original investment has generated taxable capital gains.
The proposed exemption is intended to make portfolio rebalancing easier and encourage investors to remain invested in the domestic mutual fund industry.
The mutual fund sector has become an important part of India’s financial system, with millions of households investing through systematic investment plans and other market-linked products.
Indian mutual funds collectively manage assets worth approximately Rs 82.6 trillion, equivalent to around USD 870.8 billion. Monthly investment schemes bring in nearly Rs 30 billion on average, reflecting the growing participation of individual investors in financial markets.
Reuters
The regulator’s proposal could help investors adjust their portfolios according to changing financial goals without facing an immediate tax burden every time they move between eligible schemes.
However, the final structure would need to clearly define the conditions under which such transfers would qualify for exemption. The government would also have to assess the possible impact on tax collections and ensure that the provision is not misused to avoid legitimate tax liabilities.
For the government, the recommendations present a policy challenge. While reducing capital gains taxation could encourage investment and strengthen financial markets, it could also affect revenue receipts at a time when resources are required for infrastructure development, welfare programmes and fiscal consolidation.
The government will also need to consider whether tax concessions alone can reverse the trend of foreign selling. Global interest rates, geopolitical uncertainty, crude oil prices, currency fluctuations and the relative valuation of Indian stocks remain important factors influencing international investment decisions.
The proposals are therefore expected to attract considerable attention from financial institutions, mutual fund companies, brokerage firms and overseas portfolio managers ahead of the next Budget.
If accepted, the changes could represent an important adjustment in India’s approach to equity market taxation. For now, however, investors will have to wait for the government’s response before treating the recommendations as confirmed policy.
The immediate significance of SEBI’s move lies in its recognition that improving market competitiveness requires attention not only to economic