SEBI Urges India to Scrap Foreign Investor Capital Gains Tax

The Securities and Exchange Board of India has recommended that the government remove the 12.5 percent long-term capital gains (LTCG) tax for foreign portfolio investors. Submitted as non-binding pre-budget representations ahead of the February Union Budget, the proposal aims to reduce transaction costs and attract portfolio inflows to align India with emerging markets such as China and Vietnam.

These recommendations follow a period of significant market underperformance. The benchmark Nifty 50 declined 4.8 percent over two years, while the MSCI emerging markets index rose 40 percent. Foreign investors have sold a record 31 billion dollars in Indian stocks this year. Brokerage firm India Infoline estimates that scrapping the LTCG tax could increase returns for foreign investors by 2.3 percentage points.

In addition to foreign investor relief, the regulator proposed that domestic mutual fund investors should not face taxable sales when switching between schemes if the units have been held for more than one year. Finance Minister Nirmala Sitharaman acknowledged that India requires equity capital to sustain growth above 7 percent and noted increasing concerns regarding the current tax regime.