In short: SEBI has reportedly recommended to the government that long-term capital gains (LTCG) tax on equity investments by foreign portfolio investors be removed, and that switching between mutual fund schemes after a year should not be taxed as a sale. The recommendations are not binding. Finance Minister Nirmala Sitharaman has said she will consider investor concerns but has not committed to scrapping the tax.
What has happened?
As part of its pre-Budget suggestions, the Securities and Exchange Board of India (SEBI) has reportedly proposed two changes, according to reports citing Reuters and others:
- No LTCG tax for foreign portfolio investors (FPIs) on their equity investments in India.
- Relief for mutual fund switches: where a domestic investor moves from one scheme to another after holding the units for more than a year, the switch would not be treated as a taxable sale.
The final decision rests with the government, which will present its proposals in the February Budget.
What does the Finance Minister say?
Speaking at an event in Mumbai on Monday, Ms Sitharaman said she recognised the concerns of equity market participants and would "consider all this". She said sustaining growth above 7% needs capital and that the government was listening to calls for support to equity markets. She also cautioned that tax concessions alone cannot be the main driver of market performance.
How are gains taxed at present?
| Type of gain | Current treatment on listed equity |
|---|---|
| Short-term capital gains | 20% |
| Securities transaction tax (STT) | 0.10% on both purchase and sale of shares |
Who is affected?
- Foreign portfolio investors: Tax is calculated on rupee gains, not dollar gains. An investor can therefore owe tax even when the dollar gain is small, or when rupee depreciation has produced a dollar loss.
- Mutual fund investors: If the switch proposal is accepted, moving between schemes after more than a year would not trigger an immediate tax.
Would it bring foreign money back?
It sees the relief lifting an average foreign investor's annual dollar return by about 2.2 percentage points. Experts quoted in the reports say crude oil prices, the rupee, global interest rates, valuations and corporate earnings matter more. As one fund manager put it, tax is "a cost for foreign funds, not the reason" they sell.
Nothing for now. These are recommendations, not law, and current rates continue to apply. Investors planning large sales or scheme switches may wish to wait for the Budget announcement and consult a tax adviser before acting.
Frequently asked questions
Has LTCG tax on foreign investors been scrapped?
No. SEBI has only recommended it. The decision rests with the government and would come through the February Budget.
Will mutual fund switches become tax-free?
Not yet. SEBI has proposed that switches between schemes after holding units for more than a year not be treated as taxable sales, but this needs government approval.
What is the current LTCG rate on listed shares?
It is 12.5% on gains above ₹1.25 lakh in a financial year, plus surcharge and 4% cess, with no indexation benefit.
Sources
- ET Markets: $64 billion out, $5 billion in? Why LTCG tax cut may not be enough to bring FIIs back
- TOI Business: Govt listening to voices of concern in equity mkts: FM Nirmala Sitharaman
- India Today: Is scrapping LTCG tax enough to bring FIIs back to Dalal Street?
- HT Business: Nirmala Sitharaman assures she will 'consider' investor concerns over LTCG tax