SEBI Recommends Removal of LTCG Tax to Attract Foreign Investors

The Securities and Exchange Board of India (SEBI) has put forward a proposal to eliminate the long-term capital gains (LTCG) tax on equity investments by foreign investors. This suggestion is part of SEBI's pre-Budget representations ahead of the Union Budget set for February 2027. The proposal is intended to enhance India's appeal as an investment destination for overseas capital and to encourage domestic retail investors to maintain their investments in mutual funds, amid challenging equity market conditions.

Currently, foreign investors incur a 12.5% LTCG tax on equity investments held for more than 12 months. Additionally, short-term capital gains on investments held for 12 months or less attract a tax rate of 20%. Investors also face a securities transaction tax (STT) for trades and withholding tax on dividends. Under SEBI's recommendation, the removal of the LTCG tax is seen as a way to alleviate the tax burden on foreign investors, an issue that has been increasingly prominent due to substantial sell-offs in Indian equities.

In 2026, foreign investors sold a record total of $31 billion in Indian stocks, with domestic markets struggling to keep pace with several emerging market counterparts over the past two years. SEBI's recommendations are particularly relevant following discussions with foreign investors throughout the past two years, where taxation emerged as a key concern.

The regulator also highlighted that transaction costs related to investing in Indian equities are among the highest globally. In addition to the LTCG tax adjustment, SEBI has suggested exempting domestic mutual fund investors from the LTCG tax when they switch from one scheme to another, provided the existing investment has been held for over a year. Presently, switching from one mutual fund scheme to another is treated as a redemption, resulting in immediate tax liabilities, even if investors are merely reallocating funds within the market.

Should the government approve SEBI's recommendations, it would afford investors more flexibility to adjust their portfolios without an immediate tax burden for redemptions. This recommendation holds particular significance considering the scale of India’s mutual fund sector, which currently manages assets worth ₹82.6 trillion, with monthly investment schemes averaging ₹3,000 crore.

While SEBI’s proposals remain advisory, the ultimate decision on whether to implement these tax changes lies with the Finance Ministry. Until a final determination is made, the existing capital gains tax regulations remain applicable to both foreign equity investors and domestic mutual fund participants. Analysts have indicated that India has the capacity to eliminate LTCG taxes without significantly impacting fiscal health, proposing instead an adjustment in exemptions and rates for long-held investments. This comes as competition among nations intensifies in attracting foreign investments.

The implications of these proposals could play a crucial role in shaping the landscape for investors in Indian equities and mutual funds in the coming years, should the government adopt them as part of the national budget planning process.