SEBI Backs Removal of LTCG Tax for Foreign Investors
The Securities and Exchange Board of India (SEBI) has reportedly recommended that the government remove the long-term capital gains (LTCG) tax on foreign investors. According to a Reuters report on 2 November 2026, citing two unnamed sources, SEBI has also suggested tax relief for domestic mutual fund investors who switch between schemes.
The suggestions form part of SEBI's pre-budget proposals to the central government ahead of the Union Budget due in February. They are recommendations, not decisions. The final call rests with the government.
What Has SEBI Recommended?
Based on press reports, the proposals are:
|
Proposal |
Details |
|
LTCG tax for foreign investors |
Scrap the 12.5% LTCG tax on listed equities held for more than a year by foreign portfolio investors (FPIs) |
|
Mutual fund switches |
Do not treat a switch from one scheme to another, or reinvestment into other schemes, as a taxable sale if units have been held for more than a year |
A source quoted by Reuters said the proposals are "aimed at reducing the upfront tax burden on foreign investors". SEBI has also reportedly said that transaction costs for investing in Indian equities are among the highest across jurisdictions.
SEBI's own paper has not been published, and the details come from anonymous sources, so the final form of any proposal may differ.
Why Is This Being Proposed?
1. Heavy foreign selling
Foreign investors have sold a record US$31 billion (about ₹2.94 lakh crore) of Indian stocks in 2026, according to the Reuters report. Other reports put the year-to-date FPI outflow from equities at over ₹3.04 lakh crore. The numbers differ because of the date and the way the data is measured. For comparison, outflows for all of 2025 were about ₹1.66 lakh crore, as per an SBI Research note.
2. Pressure on the rupee
Sustained selling has put pressure on the Indian currency.
3. Underperformance versus peers
Reports say the Nifty 50 fell about 4.8% over two years, while the MSCI Emerging Markets index rose about 40%.
4. Investor feedback on taxes
SEBI has reportedly held several meetings with foreign investors over the past two years. Taxation came up consistently, even as selling continued.
5. Other factors behind outflows
SBI Research pointed to high crude oil prices, a stronger dollar, rising US bond yields and the appeal of AI-linked stocks in North Asian markets as reasons for the outflows.
How Is Capital Gains Tax on Equities Charged Today?
|
Item |
Current position (as reported) |
|
LTCG (held more than 12 months) |
12.5% on listed equities and equity mutual funds |
|
LTCG exemption |
Gains up to ₹1.25 lakh in a financial year are exempt |
|
STCG (held 12 months or less) |
20% |
|
Other taxes |
Securities transaction tax (STT) on trades and withholding tax on dividends |
The 12.5% LTCG rate applies equally to FPIs, domestic investors and retail investors. Check your own tax position, as surcharge and treaty benefits can apply to foreign investors.
Is This Proposal Part of a Wider Debate?
Several developments in 2026 point to an ongoing debate on tax and the markets:
- SBI Research (Ecowrap, 12 October 2026) called for removing LTCG tax on equities, along with extending the holding period for tax purposes to 2–3 years, to anchor volatile foreign flows.
- Government statement in Parliament (July 2026): The Centre said in a written Lok Sabha reply that there was no proposal under consideration to scrap LTCG on equities for retail and domestic investors. It said capital gains tax rates are reviewed periodically as part of the Budget process.
- Finance Minister's remarks: The Finance Minister has said the government is open to feedback on LTCG and STCG, and in October she welcomed suggestions on removing STT, according to reports.
- Earlier relief for bond investors: An ordinance in 2026 exempted FPI interest income and capital gains from government securities. It did not extend to equities.
- Reports on the Centre's options: Press reports say the Centre is looking at tax structures in markets such as South Korea, Taiwan and Brazil, and that changes could be considered in the next Budget. Experts have also floated a holding-period-based sliding tax rate. These are not government decisions.
What Could Change If the Government Agrees?
For foreign investors
- Lower tax on long-term gains could raise post-tax returns. Brokerage IIFL estimates that scrapping capital gains tax could raise foreign investors' returns by about 2.3 percentage points. This is a projection, not a confirmed outcome.
- Jefferies has said that cutting capital gains tax could make the Indian market more attractive and support portfolio inflows.
- Foreign selling is driven by many factors, such as global rates, the dollar, valuations and earnings growth, so a tax cut alone may not reverse outflows.
For the market
- Some market participants see it as a likely positive. Raamdeo Agrawal of Motilal Oswal said that if it happens it is "likely to be viewed largely as a positive development", adding that "we will have to wait for the final announcement".
- Stronger inflows could support the rupee and market sentiment.
For domestic and mutual fund investors
- If the switch proposal is accepted, investors who hold units for more than a year could move between schemes without triggering a tax bill. This could let investors rebalance more freely.
- The proposals as reported do not say whether domestic investors' own LTCG rate would change. The government has said it has no plan to scrap LTCG for retail and domestic investors.
For the government
- Tax collection could fall. LTCG collections rose to ₹1.29 lakh crore in the assessment year 2025-26, from ₹72,249 crore in the previous year, according to a Parliament reply.
- Policymakers have also pointed to concerns about tax parity between domestic and foreign investors and about round-tripping of money.
What Happens Next?
- SEBI's recommendations go to the Finance Ministry as pre-budget inputs.
- The government weighs them along with revenue, fairness between investor categories and market impact.
- Any change would most likely be announced in the Union Budget in February 2027 (Budget 2027-28), and would need to be passed by Parliament in the Finance Bill.
- Until a change is notified, current tax rules continue to apply.
What Should Investors Do Now?
- Do not act on a proposal as if it were law. Rules stay unchanged until notified.
- Keep investing decisions based on goals, not on possible tax changes.
- Keep records of purchase dates and holding periods, since many tax provisions depend on them.
- Follow official announcements, especially the Budget.
Speak to a tax advisor about your own situation, especially if you invest across borders or switch funds often.
Frequently Asked Questions
No. SEBI has reportedly recommended it. The decision rests with the government and is not final.
12.5% on listed equities and equity mutual funds held for more than a year, with gains up to ₹1.25 lakh in a year exempt. Short-term gains are taxed at 20%.
Reuters, citing two unnamed sources. Other outlets repeated the report.
Not according to the reports. The proposal is for foreign investors. The government told Parliament in July that it was not considering scrapping LTCG for retail and domestic investors.
Switching between schemes, or reinvesting in other schemes, would not be treated as a taxable sale if units were held for more than a year.
A record of about US$31 billion (about ₹2.94 lakh crore) according to the Reuters report. Other reports cite over ₹3.04 lakh crore year to date.
Any change would likely come through the Union Budget in February 2027, followed by parliamentary approval.
It could help, but flows depend on many factors, including global interest rates, the dollar, valuations and earnings.
No. Current rules apply until any change is notified.
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