Jefferies says LTCG tax cut could lure foreign investors back to Indian equities
Jefferies warns that a reduction in India's long-term capital gains tax may revive foreign portfolio inflows, with banks, Reliance Industries and other large-caps likely to benefit the most.
Jefferies analysts note that a potential cut in India's long-term capital gains tax on equities could encourage foreign portfolio investors to increase their holdings in Indian stocks, which have seen sizable outflows in recent fiscal years. The brokerage said the tax relief could also bolster the rupee by improving investor sentiment.
The firm highlighted that foreign investors have withdrawn $21 billion in fiscal 2026 and another $16.5 billion in fiscal 2027 to date, leaving their overall positioning in Indian equities described as "light." Recent tax concessions for foreign investors in government bonds prompted $9 billion of debt inflows in June-July 2026, suggesting a similar equity tax cut might have a comparable effect.
Jefferies identified banks as its top preference among oversold sectors, adding that energy firm Reliance Industries, utilities and real-estate stocks are also likely beneficiaries. Large-cap financials such as HDFC Bank, ICICI Bank, Axis Bank, State Bank of India, Kotak Mahindra Bank, Bajaj Finance and Shriram Finance could see renewed buying, while the brokerage's list of heavily held companies includes Bharti Airtel, Infosys, Larsen & Toubro, Tata Consultancy Services, Power Grid Corp., NTPC, Titan, Maruti Suzuki, Apollo Hospitals, Adani Power and Adani Ports.
The note outlined three possible approaches for the government to adjust equity taxation: an across-the-board reduction in long- and short-term capital gains rates, a targeted cut for foreign investors, or permitting gains to be calculated in dollar terms to allow indexation benefits. Any change would need to balance the fiscal impact—equity long-term capital gains generated Rs 1.3 lakh crore in FY25, while securities transaction tax contributed about Rs 85,000 crore in FY27—with the goal of making Indian markets more competitive.
"An equity LTCG cut may similarly help improve FPI sentiment and flows providing support to the INR," Jefferies said.
The brokerage emphasized a preference for large-caps over mid-caps, noting that large-caps have outperformed by roughly five percentage points in 2026 and trade at a 23 % discount to their ten-year average valuation.