SEBI seeks LTCG tax removal for foreign investors

India’s securities regulator, the Securities and Exchange Board of India (SEBI), has recommended that the government remove the long-term capital gains (LTCG) tax levied on foreign investors in domestic equities. The proposals, made as part of SEBI’s pre-budget representations, seek to reduce the upfront tax burden on overseas investors and strengthen the appeal of Indian markets. The recommendations are not binding, and any change can only take effect after a government decision.

The initiative comes ahead of the next federal budget and follows extensive consultations with foreign investors over the last two years. These discussions highlighted repeated concerns about India’s capital gains tax framework and its impact on portfolio inflows. SEBI’s push targets what it has described as relatively high transaction costs in India’s equity market compared with other jurisdictions.

Under the existing framework, investors pay long-term capital gains tax of 12.5% on eligible listed equities and equity-oriented mutual funds when holdings exceed one year and gains cross a specified annual threshold. Short-term capital gains on eligible equity transactions are taxed at 20%. These levies come on top of securities transaction tax on trades and withholding tax on dividends, raising the overall cost of investing.

Foreign investors have pointed to these taxes as a key concern in their interactions with the regulator. Brokerage firm Jefferies said reducing capital gains taxes could improve the attractiveness of Indian equities for overseas participants.

SEBI’s recommendations arrive amid sustained foreign selling and relatively weak performance of Indian equities against some emerging market peers. Foreign investors have withdrawn approximately $31 billion from Indian stocks so far in 2026, contributing to pressure on the local currency. Over the past two years, the benchmark Nifty 50 index has declined 4.8%, while the MSCI Emerging Markets Index has risen 40%.

The regulator’s proposals are framed as part of efforts to galvanise what has been described as underachieving equity markets. Foreign portfolio flows remain a key focus for policymakers and regulators, given their influence on valuations, liquidity and currency dynamics.

Alongside the foreign investor measures, SEBI has proposed tax changes aimed at retaining and encouraging domestic mutual fund participation. The regulator has recommended that domestic mutual fund investors be exempt from LTCG tax when they sell existing fund units to invest in new schemes, provided certain conditions such as holding periods are met. One element of the proposal is that switching from one mutual fund scheme to another should not be treated as a taxable sale if units have been held for more than a year.

Indian mutual funds manage assets of 82.6 trillion rupees, with average monthly inflows of about 30 billion rupees through systematic investment schemes. Allowing investors to rebalance across schemes without triggering immediate LTCG liabilities is intended to support longer-term participation in domestic funds. At present, such switches are generally treated as redemptions followed by fresh investments, potentially creating a tax event.

The LTCG proposals for foreign investors and mutual fund holders are part of SEBI’s broader pre-budget tax recommendations to the government. Finance Minister Nirmala Sitharaman has previously indicated that authorities are open to considering suggestions on capital gains taxation during budget consultations, while stopping short of committing to specific changes. Email queries to SEBI and the finance ministry were not answered.

No exemptions or rule changes have been announced so far, and the existing LTCG regime remains fully in force. Any implementation details, eligibility criteria and timelines for potential relief would depend on the government’s decisions in the upcoming budget process.