MUMBAI -- The Securities and Exchange Board of India has recommended that the Indian government remove the 12.5% long-term capital gains tax on foreign portfolio investors, according to two people with direct knowledge of the matter, as the country faces record outflows from its equity market.
The recommendation, reported by Reuters, comes as FPI withdrawals from Indian equities totaled ₹2.91 lakh crore in 2026, including ₹34,843 crore withdrawn in October, pushing the Nifty 50 down 10% year-to-date toward its biggest annual decline since 2011.
In addition to the foreign investor tax removal, SEBI proposed exempting domestic mutual fund investors from LTCG tax when selling existing holdings to invest in new ones. The proposals are designed to boost post-tax returns as market performance has lagged emerging counterparts.
Finance Minister Nirmala Sitharaman said at the Bloomberg New Economy Forum in mid-October that she was keen to listen to discussions around securities transaction tax as India seeks to attract capital inflows. She declined to comment specifically on the possibility of LTCG tax changes, saying it was healthy to have the debate.
Global brokerage Jefferies has outlined three possible changes to equity LTCG rules: cutting both LTCG and STCG tax rates for all investors; reducing LTCG tax only for foreign portfolio investors; or allowing FPIs to calculate capital gains in US dollar terms to offset currency fluctuation impacts.
SEBI has noted that transaction costs associated with investing in Indian equities are among the highest across jurisdictions. Domestic mutual fund buying has helped cushion the market's decline in 2026, though without their support the fall could have been steeper.
The Indian government is expected to consider these recommendations ahead of the Union Budget due in February.
