SEBI Proposes Scrapping 12.5% LTCG Tax For Foreign Investors As $31 Billion Outflows Put Indian Markets Under Pressure

The Securities and Exchange Board of India (SEBI) has recommended that the government remove the long-term capital gains (LTCG) tax imposed on foreign investors. The market regulator has also proposed exempting domestic mutual fund investors from LTCG tax when they switch from one scheme to another, provided they have held the units for more than a year.

Foreign investors have sold a record $31 billion worth of Indian stocks this year. Meanwhile, investors currently pay 12.5% LTCG tax on securities held for more than a year and 20% short-term capital gains (STCG) tax, apart from securities transaction tax and withholding tax on dividends.

SEBI LTCG Tax Proposal To Reduce Foreign Investor Costs

The recommendations follow discussions between the regulator and foreign investors over the past two years. Investors have repeatedly raised concerns about India's tax structure. SEBI has also pointed out that transaction costs for equity investments in India are among the highest across markets.

A report suggests that removing capital gains tax could improve India's appeal to overseas investors and support portfolio inflows. Another estimate indicates that scrapping the tax could increase foreign investors' returns by 2.3 percentage points.

However, the proposals are not binding. They form part of SEBI's pre-budget representations, and the government will take the final decision ahead of the annual budget in February 2027.

Mutual Fund Investors May Also Get Tax Relief

SEBI has proposed that switching between domestic mutual fund schemes should not count as a taxable sale if investors have held the units for more than a year.

The proposal comes as returns from domestic equity investments have remained weak. The Nifty 50 has fallen 4.8% over two years, while the MSCI Emerging Markets index has gained 40%. Large-cap equity mutual funds have also recorded an average return decline of 1.6% over the same period.

India's mutual fund industry holds ₹82.6 trillion in assets under management (AUM). Monthly investment schemes bring in an average of ₹30 billion each month. The proposed tax relief is intended to encourage investors to remain invested in domestic mutual funds.

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