India’s markets regulator has recommended that the government remove the LTCG tax on foreign investors, Reuters reported on 2 November, citing two people with direct knowledge of the matter. The Securities and Exchange Board of India (SEBI) also proposed tax relief for domestic mutual fund investors who switch between schemes, as part of its pre-budget representations to the government.
The recommendations are not binding, and the final decision rests with the government ahead of the annual budget in February. The proposals have not been reported previously, and the people cited by Reuters declined to be named because the pre-budget representations are private. SEBI and the finance ministry had not responded to Reuters’ emailed requests for comment at the time of publication.
What the LTCG tax proposal covers
Foreign investors currently pay LTCG tax of 12.5 per cent on equity investments held for more than one year. SEBI has recommended removing that levy for foreign investors, in a move aimed at making Indian equities more attractive at a time of record foreign outflows and weak market returns.
Foreign investors also pay short-term capital gains tax of 20 per cent on securities sold before the one-year threshold, along with securities transaction taxes and withholding taxes on dividends. The LTCG tax proposal would remove one layer of that tax burden, while leaving the other charges in place. The change would need a government decision and a budget announcement before it could take effect.
Finance Minister Nirmala Sitharaman has said she will consider all views put forward on equity taxation in the upcoming budget, without committing to any change. That remark, made during pre-budget consultations, leaves the door open to the SEBI proposal but does not promise it. The February budget is the next point at which the government could act.
LTCG tax relief for mutual fund switches
For domestic investors, SEBI proposed that switching from one mutual fund scheme to another should not be treated as a taxable sale when the units have been held for more than a year. At present, moving money between schemes can trigger a tax bill even when the investor stays invested in mutual funds.
The proposal is aimed at encouraging investors to remain invested in domestic mutual funds rather than facing a tax liability when they shift between schemes. An investor who sells units held for more than a year to invest in a new scheme would, under the proposal, not face LTCG tax on that switch. The exact eligibility criteria and implementation details have not been announced.
Industry bodies have supported friendlier taxation for foreign investors, arguing that it helps retain foreign capital at a time of rising global yields. Vietnam, which does not levy long-term capital gains tax on equity investments, is often cited in such arguments as a more tax-efficient destination for foreign capital when compared with India’s current 12.5 per cent rate.
Why the LTCG tax proposal matters now
The LTCG tax proposal arrives after a period in which foreign investors have pulled money from Indian equities and market returns have lagged. Removing the tax would lower the cost of investing in India for foreign portfolio investors, and it would signal that the government is willing to adjust tax rules to compete for global capital.
Tax alone does not decide where foreign money goes. Earnings growth, currency stability, valuations and global interest rates all weigh on the decision, and a tax cut helps at the margin rather than settling it. The mutual fund proposal, by contrast, touches domestic savers directly, since it would let them rebalance between schemes without a tax charge after a year. Both proposals now wait on the government, which will weigh revenue effects against the aim of drawing and retaining investment. The proposals were reported on 2 November, a day when the Sensex rose 1.66 per cent to 75,692.78 and the Nifty gained 1.68 per cent to 23,440.80. Until the budget, the existing LTCG tax rules remain in force, and no exemption has been announced.