India's equity tax framework is facing increasing scrutiny as foreign investors continue to pull funds from domestic markets. The debate centers on whether the current tax structure makes India less competitive compared to other global investment destinations like the US, Hong Kong, and Japan, which often provide exemptions on equity gains for international investors.
India's Equity Tax Regime Compared Globally
In India, listed equity investments held for over a year attract a Long-Term Capital Gains (LTCG) tax of 12.5%, while Short-Term Capital Gains (STCG) are taxed at 20%. Additionally, a Securities Transaction Tax (STT) is levied on specific transactions. This contrasts sharply with several major markets:
- United States, Hong Kong, and Japan: Equity gains for foreign investors are generally exempt, though specific eligibility conditions apply. Hong Kong levies an STT of 0.1% on both buyers and sellers, while the US and Japan report zero STT.
- China: Exempts gains on some shares while taxing others at 10%.
- Taiwan: Exempts equity gains but imposes an STT of 0.3% on sellers.
- South Korea: Features a tax treatment that includes 11% of sales proceeds or 22% of net gains, alongside an STT of 0.2% on sellers.
These differences highlight that investors consider not just capital gains tax rates but also transaction costs, making the overall tax burden a complex calculation that varies by investor type and specific rules.
Foreign Investor Outflows and Market Impact
Foreign investors have been consistent sellers of Indian equities. Data from Jefferies indicates that Foreign Portfolio Investors (FPIs) withdrew $21 billion in FY26, followed by another $16.5 billion by October 2026 in FY27. Total equity-market-related foreign exits, including foreign promoters and private equity investors, reached $110 billion between April 2025 and October 2026.
Furthermore, India's weight in 70 large emerging-market funds, managing $380 billion, was 0.3 percentage points below the benchmark as of June 2026. This marks a significant shift from an average overweight position of 2.2 percentage points over the preceding decade. While taxation is a factor, these outflows are also influenced by market valuations, earnings prospects, currency movements, and broader global investment conditions.
Potential Tax Cuts and Future Outlook
Discussions around a possible reduction in India's LTCG tax are ongoing, though no official decision has been announced. Jefferies suggests three options to improve India's appeal:
- An across-the-board reduction in both LTCG and STCG rates.
- An FPI-specific LTCG cut.
- Calculating foreign investors’ gains in US dollar terms to offer an indexation benefit.
An improved FPI sentiment following such a tax reduction could boost equity inflows and support the Indian rupee. However, the government must balance these potential benefits against revenue implications; equity LTCG collections were ₹1.3 lakh crore in FY25, and STT collections were annualized at around ₹85,000 crore in FY27.
Ultimately, a more competitive tax regime could improve post-tax returns for eligible investors. Yet, sustained foreign inflows will also depend on broader market conditions, valuations, earnings growth, market depth, and the outlook for the rupee, underscoring that taxation is just one component of India's overall investment proposition.