SEBI has recommended changes to long-term capital gains taxation to attract foreign investors and encourage domestic mutual fund investors to stay invested.
India’s markets regulator has
recommended the government remove the long-term capital gains
(LTCG) tax imposed on foreign investors, two sources with direct
knowledge of the matter said, as India looks to galvanise its
underachieving equity markets.
The Securities and Exchange Board of India (SEBI) has also
proposed tax relief for domestic mutual fund investors,
suggesting they be exempt from LTCG if they are selling existing
holdings to invest in new ones, the sources said.
The recommendations, which come months before the annual
federal budget in February, are not binding and a final call
rests with the government.
India’s equity market has lagged emerging market peers over
the past two years. Foreign investors have sold a record $31
billion in Indian stocks this year and overseas investments by
retail investors have surged as returns have stagnated.
SEBI’s recommendations follow scores of meetings held by the
regulator with foreign investors over the last two years as
selling persisted, putting pressure on the Indian currency.
One consistent piece of feedback from investors has been the
need to change how India taxes them, the sources said.
“The proposals are aimed at reducing the upfront tax burden
on foreign investors,” one of the two sources said.
The sources declined to be named as the recommendations,
which have not been reported previously, are part of its
pre-budget representations and are private.
Email queries sent to SEBI and the federal finance ministry
were not answered.
WOOING FOREIGN INVESTORS
SEBI has said that transaction costs associated with
investing in equities in India are among the highest across
jurisdictions.
Investors currently pay long-term capital gains tax of 12.5%
for securities held for more than a year and short-term capital
gains tax of 20%, in addition to securities transaction taxes on
trades and withholding taxes on dividends.
Brokerage firm Jefferies in a note earlier this week said
any reduction in capital gains taxes could improve the market’s
attractiveness for foreign investors and support portfolio
inflows.
Brokerage firm IIFL estimates scrapping capital gains tax
could lift foreign investors’ returns by 2.3 percentage points.
RELIEF FOR DOMESTIC MUTUAL FUND INVESTORS
India’s benchmark Nifty 50 has declined 4.8% in the
last two years while the MSCI emerging market index is up 40%.
Returns from diversified domestic equity mutual funds — now
a common way of saving for retail investors — have also
stagnated over this period. Average returns from funds investing
in large-cap stocks are down 1.6%, according to data from fund
research firm Morningstar.
To encourage investors to stay invested in domestic mutual
funds, SEBI has recommended that switching from one mutual fund
scheme to another should not be treated as a taxable sale if the
units have been held for more than a year, the sources said.
Indian mutual funds hold 82.6 trillion rupees ($870.80
billion) in assets under management, with an average of 30
billion rupees flowing in each month via monthly investment
schemes.
Published on November 2, 2026