SEBI Proposal to Ease Tax Burden for Foreign Investors
India's markets regulator, SEBI, has reportedly proposed the removal of long-term capital gains (LTCG) tax on investments made by foreign portfolio investors (FPIs). This potential policy shift comes after Indian markets experienced significant FPI outflows totaling $64 billion over the past two years, leading many to speculate on a potential rebound for the Sensex and Nifty indices.
Currently, FPIs are subject to a 20 percent short-term capital gains (STCG) tax and a 12.5 percent LTCG tax on listed equity, with additional surcharges and cess making the effective rates even higher. Some investors may claim treaty relief based on their jurisdiction.
Expert Views on Market Impact and Inflows
According to analysis by JM Financial, while the removal of LTCG tax would be beneficial, it acts as a relatively small lever compared to broader market valuations. The brokerage suggests that eliminating LTCG could add approximately 2.2 percentage points to an average year’s dollar return for foreign investors, comparable to the typical drag from rupee depreciation.
JM Financial emphasized that such a move would primarily enhance the responsiveness of capital flows to an already rising market, rather than being the sole catalyst for an ascent. In its bull case scenario, any relief from LTCG tax could contribute an additional $3–5 billion to FPI inflows by FY28E. The firm also highlighted that a credible removal or reform of holding periods in the upcoming February 2027 Budget would signal to allocators that policy is supportive, potentially mattering most at the margin of dedicated versus benchmark-relative investment.
Broader Context and Global Comparison
The discussion around capital gains tax for FPIs isn't new. Finance Minister Nirmala Sitharaman indicated her openness to feedback on LTCG and Securities Transaction Tax (STT) in mid-October, which saw the Nifty rise 1.6 percent on that day. Notably, capital gains tax in India is computed on rupee gains, meaning FPIs can owe tax even if their dollar-denominated returns are smaller or negative due to rupee depreciation.
Data reveals that equity LTCG collections stood at Rs 1.29 lakh crore in FY25, representing about 2.9 percent of the Centre’s budgeted gross tax receipts for FY27. India stands out among major Asian markets concerning capital gains tax on listed shares:
- Korea: Exempts gains on listed shares unless the investor held 25 percent or more in the five years prior to sale.
- Taiwan: Has no capital gains tax on listed securities (suspended in 2016) and charges a 0.3 percent transaction tax on sales.
- Singapore and Hong Kong: Have no capital gains tax.
- China: Gains on listed shares are provisionally exempt.
- Indonesia: Charges a flat 0.1 percent on gross transaction value.
- Brazil: Generally exempts non-residents on regulated exchanges, subject to specific rules.
JM Financial noted that foreign investors were net buyers in Korean and Taiwanese equities during the same periods they divested from India, though sector mix and earnings momentum also play a role across these markets. The potential removal of LTCG tax is seen as a crucial step towards aligning India’s investment landscape more closely with global peers and attracting sustained foreign capital.