Highlights
- SEBI recommends LTCG tax removal for foreign investors.
- Mutual fund reinvestments could receive capital gains tax relief.
- Government approval required before proposed exemptions take effect.
SEBI LTCG Tax Proposal: India’s markets regulator, the Securities and Exchange Board of India (SEBI), has recommended removing long-term capital gains (LTCG) tax for foreign investors, Reuters reported on Monday, November 2, citing two sources with direct knowledge of the matter.
The regulator has also proposed exempting mutual fund investors from LTCG tax when they sell existing holdings to reinvest in new mutual fund schemes, according to the report. The recommendations come ahead of the Union Budget 2027, with the government expected to take the final decision.
The proposals follow consultations with overseas investors amid sustained foreign selling and the underperformance of Indian equities relative to other emerging markets, Reuters reported.
Foreign investors have withdrawn approximately USD 31 billion from Indian equities so far in 2026. Meanwhile, the benchmark Nifty 50 has declined 4.8 per cent over the past two years, compared with a 40 per cent rise in the MSCI Emerging Markets Index.
According to the report, foreign investors have repeatedly raised concerns about India’s capital gains taxation framework during discussions with the regulator.
One source cited by the news agency said the recommendations aimed to reduce the tax burden on overseas investors and make Indian equities more attractive.
What could change for mutual fund investors?
Under the proposed framework, investors could receive LTCG tax relief when moving money from existing mutual fund holdings into new schemes, subject to the conditions eventually approved by the government.
Currently, switching between mutual fund schemes is generally treated as a redemption of existing units followed by a fresh investment, potentially triggering capital gains tax.
The recommendation could allow investors to rebalance their mutual fund portfolios without an immediate LTCG tax liability on eligible transactions.
However, the exact eligibility criteria and implementation details have not been announced.
Under India’s existing tax framework, long-term capital gains exceeding Rs 1.25 lakh annually on eligible listed equities and equity-oriented mutual funds attract a tax of 12.5 per cent.
For these investments, gains are generally classified as long-term when the holding period exceeds 12 months. Short-term capital gains on eligible equity transactions attract a tax of 20 per cent.
Applicable transactions may also attract securities transaction tax.
What could the proposals mean for foreign investors?
According to Reuters, brokerage firm Jefferies has indicated that a reduction in capital gains taxation could improve the attractiveness of Indian equities for overseas investors.
Separately, IIFL estimates that eliminating capital gains tax could increase foreign investors’ returns by 2.3 percentage points.
The recommendations come at a time when foreign portfolio investment flows remain a key concern for Indian equity markets.
Has the government taken a decision?
The proposals are part of SEBI’s pre-Budget recommendations to the government.
Reuters reported that SEBI and the finance ministry had not responded to its emailed requests for comment at the time of publication.
No tax exemption has been announced so far, and the existing LTCG tax rules remain in force.