India’s markets regulator has a clear message for the government: scrap the long-term capital gains (LTCG) tax for foreign investors. According to a Reuters report published on Monday, the Securities and Exchange Board of India (SEBI) has recommended the move in its pre-budget representations, as overseas money leaves Indian equities at a record pace.
The proposal, reported by two sources with direct knowledge, landed just as markets rallied on hopes of tax relief. The Sensex surged more than 950 points during Monday’s session and the Nifty crossed 23,300, with hopes of LTCG relief among the factors driving the gains.
What SEBI has actually proposed
SEBI’s recommendations, which have not been reported previously and remain private, cover two groups of investors. The first and biggest ask is the complete removal of LTCG tax for foreign investors. The second is relief for domestic mutual fund investors: they would be exempt from LTCG if they sell existing holdings only to invest the money in new ones, a change aimed at stopping the tax from punishing investors who simply rebalance their portfolios.
The regulator’s case is straightforward: lower the upfront tax burden on foreign investors and make Indian markets more competitive with rival destinations, where such gains are often taxed lightly or not at all. SEBI has held scores of meetings with foreign investors over the last two years as selling persisted and pressured the rupee.
There is an important caveat. These are recommendations, not decisions. They form part of SEBI’s pre-budget representations ahead of the annual federal budget in February, and they are not binding on the government. The final call rests with the finance ministry, which did not respond to queries on the report. SEBI also did not comment.
Why the timing matters: Rs 3.1 lakh crore has already left
The backdrop is a foreign investor exodus that has grown hard to ignore. Cumulative foreign portfolio investor (FPI) outflows from Indian equities have reached Rs 3.1 lakh crore so far in 2026, according to Central Depository Services Ltd data, substantially higher than the Rs 1.7 lakh crore withdrawn during the whole of 2025. October alone saw outflows of Rs 44,166 crore, SBI Research noted.
At present, India levies LTCG tax at 12.5 per cent on gains from listed equities above Rs 1.25 lakh in a financial year, with no indexation benefit, for both domestic and foreign investors. One irritant for overseas funds is that the liability is calculated in rupee terms, so depreciation can leave an investor with a tax bill even when gains have been wiped out in dollar terms.
A debate that has been building for weeks
SEBI is not the first voice calling for change. SBI Research has called for abolishing LTCG tax on equities and extending the holding period to two or three years, to anchor volatile foreign capital for longer. Industry body PHDCCI has urged abolishing LTCG on listed equities and cutting the short-term capital gains (STCG) rate to 10 per cent from 20 per cent.
Finance Minister Nirmala Sitharaman said on October 13 that the government was open to hearing views on LTCG tax and the securities transaction tax (STT), though she made no commitment to changes in Budget 2027. The government has also been examining whether foreign investors’ gains should be calculated in dollar terms instead of rupees.
There is precedent for such an exemption. Earlier this year, the government scrapped withholding tax and capital gains tax on foreign investors’ investments in government securities. Extending similar treatment to equities would be a much bigger move, given the size of the stock market and the revenue at stake.
What happens next
- Budget decision: The finance ministry will weigh SEBI’s suggestions before the February budget. Nothing is decided yet.
- Revenue trade-off: Scrapping the tax would cost revenue, but steadier inflows and a stronger rupee may be judged worth more.
- Market watch: Monday’s rally shows how sensitive stocks are to tax signals. Any hint of acceptance before the budget could keep sentiment buoyant.
- Domestic investors: The mutual fund proposal matters for ordinary savers too, removing a tax penalty on switching between funds.
For now, the ball is in the government’s court. With foreign outflows running at nearly twice last year’s pace, the pressure to act before the February budget is only growing.
FAQs
What has SEBI recommended?
SEBI wants LTCG tax removed for foreign investors, and mutual fund investors exempted from LTCG when they sell holdings only to invest in new ones.
Is the LTCG tax already scrapped?
No. They are private pre-budget representations, not binding. The final decision rests with the government, likely in the February budget.
What is the current LTCG tax rate on equities?
Listed equities attract LTCG tax of 12.5 per cent on gains above Rs 1.25 lakh in a financial year, with no indexation benefit, for both domestic and foreign investors.
Why does this matter now?
Foreign investors have withdrawn Rs 3.1 lakh crore from Indian equities so far in 2026, far above the Rs 1.7 lakh crore pulled out in all of 2025.
Has the government exempted foreign investors from capital gains tax before?
Yes, earlier this year it scrapped withholding tax and capital gains tax on foreign investors’ government security investments. The new proposal would extend that treatment to equities.
Informeia will track the government’s response ahead of the February budget.
