SEBI seeks LTCG tax relief for FPIs, mutual funds as equity outflows mount

The Securities and Exchange Board of India (SEBI) has recommended scrapping the 12.5 per cent long-term capital gains (LTCG) tax on listed equities held for more than a year by foreign portfolio investors (FPIs), as part of its pre-budget proposals submitted to the central government ahead of the Union Budget in February, according to a Reuters report.

SEBI has also proposed tax relief for domestic mutual fund investors, recommending that they be exempt from LTCG tax when selling existing holdings to switch to or reinvest in other schemes, provided the units have been held for more than a year, the report said.

Current structure

Currently, foreign investors pay 12.5 per cent LTCG tax on equity holdings held for more than a year and 20 per cent short-term capital gains (STCG) tax on holdings sold within a year. They are also subject to securities transaction tax (STT) and dividend withholding taxes.

Also read: LTCG, STT under scrutiny as Sitharaman opens door to capital gains tax review

The recommendations come as foreign investors have sold a record $31 billion worth of Indian stocks in 2026, amid a prolonged underperformance of the country's equity market compared with its emerging-market peers.

SEBI's proposals follow several meetings held by the regulator with foreign investors over the past two years, as sustained selling has put pressure on the rupee. One consistent concern raised by investors has been India's tax structure, the sources told Reuters.

“The proposals are aimed at reducing the upfront tax burden on foreign investors,” one of the sources said.

Wooing foreign investors

India's benchmark Nifty 50 has declined 4.8 per cent over the past two years, while the MSCI emerging markets index has gained 40 per cent.

SEBI has said that transaction costs associated with investing in Indian equities are among the highest across jurisdictions. Brokerage firm Jefferies said a reduction in capital gains taxes could make the Indian market more attractive to foreign investors and support portfolio inflows.

Also read: SBI Research seeks LTCG tax waiver to stem rupee slide, increase capital inflows

IIFL estimates that scrapping the capital gains tax could boost foreign investors' returns by around 2.3 percentage points.

Relief for mutual fund investors

To encourage investors to remain invested in domestic mutual funds, SEBI has recommended that switching from one scheme to another should not be treated as a taxable sale if the units have been held for more than a year.

Indian mutual funds manage assets worth Rs 82.6 trillion, with monthly investment schemes bringing in an average of Rs 30 billion each month.

Also read: FPIs withdraw Rs 20,974 cr from equities in Sept amid global uncertainty

The recommendations are non-binding, and any changes to the tax regime will depend on a decision by the Finance Ministry as part of the upcoming Union Budget.