Sebi recommends ending LTCG tax for foreign investors and easing rules for mutual-fund switches

The Securities and Exchange Board of India (Sebi) has put forward two tax-relief measures for the upcoming budget. It recommends that the government eliminate the 12.5% long-term capital gains (LTCG) tax on equity gains earned by foreign portfolio investors (FPIs). In a separate proposal, Sebi suggests domestic mutual-fund investors should not be taxed on LTCG when they move between schemes, provided the holdings have been held for more than a year.

Sebi said the recommendations aim to lower the upfront tax burden on overseas investors and make Indian equities more attractive, after months of outflows that have pressured the market and the rupee. Data from the Central Depository Services Ltd show FPIs withdrew about ₹35 trillion from Indian equities in the first ten months of 2026, though a brief net inflow was recorded at the end of October.

Brokerage firms estimate that removing the LTCG tax could raise foreign investors’ after-tax returns by roughly 2.3 percentage points. IIFL and Jefferies note that the current tax structure, together with high transaction costs, has been a key concern for FPIs, who have shifted funds to other markets amid higher global interest rates and elevated oil prices.

"Tax efficiency alone will not bring foreign capital back to India," said Nirav Karkera, head of research at W by Groww. He added that earnings growth, valuations, currency stability and overall market attractiveness remain the primary drivers of foreign investment.

The proposals are non-binding and will be considered by the government before the Union Budget scheduled for February 2027. If adopted, the changes could affect the government's revenue, which collected about ₹1.29 trillion in LTCG tax in the fiscal year 2024-25.