In short: India's securities regulator has reportedly recommended that the government remove long-term capital gains (LTCG) tax for foreign investors. It has also reportedly suggested that switching between mutual fund schemes should not be taxed if units were held for over a year. The proposals are not binding, and the final decision rests with the government.
What has been reported?
According to a report based on two unnamed sources, the Securities and Exchange Board of India (SEBI) has made pre-Budget representations to the government. The sources declined to be named because the representations are private. Emails to SEBI and the finance ministry were reportedly not answered, so neither has confirmed the details.
- Mutual fund investors: Moving money from one scheme to another should reportedly not count as a taxable sale, provided the units have been held for more than a year.
The recommendations come months before the Union Budget due in February. They are advisory only.
What is the tax position today?
| Item | Current position (as reported) |
|---|---|
| LTCG on listed equity (held over a year) | 12.5% |
| Short-term capital gains | 20% |
| Annual LTCG exemption | Rs 1.25 lakh |
These taxes come on top of securities transaction taxes on trades and withholding taxes on dividends. The government raised the LTCG rate from 10% to 12.5% in July 2024, and the exemption from Rs 1 lakh to Rs 1.25 lakh. The short-term rate went up from 15% to 20% at the same time.
Why is SEBI said to be pushing this?
- Foreign investors have sold a record $31 billion of Indian stocks this year, which has put pressure on the rupee.
- The Nifty 50 has fallen 4.8% in two years, while the MSCI emerging markets index has risen 40%.
- According to Morningstar data, average returns of large-cap funds are down 1.6% over the period.
- Investor feedback in meetings with the regulator over two years repeatedly pointed to how India taxes them.
- SEBI has said transaction costs of investing in Indian equities are among the highest across jurisdictions.
Brokerage IIFL estimates that scrapping capital gains tax could lift foreign investors' returns by 2.3 percentage points. Jefferies has said lower capital gains taxes could make India more attractive to foreign investors.
What do critics say?
Finance Minister Nirmala Sitharaman has said the government would be keen to hear views on removing LTCG tax during Budget consultations. Some experts caution against a full rollback:
- Revenue: Equity LTCG reportedly brought in about Rs 1.29 lakh crore in assessment year 2025-26, against Rs 72,249 crore a year earlier.
- Uneven benefit: Larger portfolios would save more. Small investors whose gains are within the Rs 1.25 lakh exemption would get no extra relief.
- Other factors: Global yields, rupee weakness and valuations also affect foreign flows.
Alternatives mentioned include a higher exemption limit, lower rates for longer holding periods and a review of STT.
What should readers do?
Nothing needs to change now. Current tax rules continue to apply until the government acts, and nothing is certain before the Budget. Avoid making buying, selling or switching decisions based only on a possible tax change. A tax adviser can help with your own situation.
Frequently asked questions
Is LTCG tax on foreign investors actually being removed?
No. This is a reported recommendation to the government. It is not binding, and the government will make the final decision.
Would mutual fund switching become tax-free for everyone?
The reported proposal covers switches from one scheme to another where the units were held for more than a year. It has not been adopted, and further details have not been reported.
Has SEBI confirmed these recommendations?
Not in the reports used here. They rely on two unnamed sources, and SEBI and the finance ministry reportedly did not answer queries.
Sources
- ET Markets: Sebi backs removal of LTCG tax for foreign investors: Report
- TOI Business: SEBI wants LTCG tax to be removed for foreign investors: Report
- India Today: Scrapping LTCG tax: Relief for investors, but at what cost?
- BusinessLine: SEBI proposes scrapping LTCG tax on foreign investors, seeks relief for mutual fund investors