5 November 2026 Punjab Khabarnama Bureau : India is considering changes to its capital gains tax structure to attract foreign investors back into the country’s stock market after a prolonged period of heavy overseas investment outflows. The Securities and Exchange Board of India (SEBI) has recommended removing the Long-Term Capital Gains (LTCG) tax on foreign portfolio investors (FPIs), as the government looks for ways to make Indian equities more competitive with other emerging markets.
The proposal comes at a time when foreign investors have been withdrawing billions of dollars from Indian equities, raising concerns about market performance, the value of the rupee and India’s attractiveness as an investment destination. Finance Minister Nirmala Sitharaman has indicated that the government is willing to consider suggestions regarding the taxation of capital gains.
The discussion is expected to gain importance ahead of the Union Budget 2027-28, although no final decision has been announced.
SEBI Recommends Removing LTCG Tax for Foreign Investors
According to a Reuters report published on November 2, SEBI has recommended that the government abolish LTCG tax on foreign portfolio investors investing in Indian equities.
The regulator has also proposed providing tax relief to domestic mutual fund investors when they switch investments from one scheme to another, provided the units have been held for more than one year.
These recommendations are part of SEBI’s pre-Budget proposals and are not binding on the government. The final decision will rest with the Finance Ministry.
SEBI believes that reducing the tax burden and transaction costs could make India’s equity market more attractive to international investors.
Why Is India Considering a Tax Cut?
Foreign investors have been selling Indian shares at a significant pace over the past two years. According to market estimates cited in recent reports, foreign portfolio investors have withdrawn approximately $64 billion from Indian equities over 25 months.
One of the major concerns raised by overseas investors is India’s taxation structure.
Currently, long-term capital gains on listed equity shares and equity-oriented mutual funds are taxed at 12.5 per cent when the investment is held for more than 12 months. Short-term capital gains are generally taxed at 20 per cent, subject to applicable conditions.
Investors also have to account for Securities Transaction Tax (STT) and other applicable charges.
Several international markets offer more favourable capital gains tax treatment, making the difference in post-tax returns an important consideration for global investment funds.
The proposed changes could help India reduce this disadvantage and encourage overseas investors to reconsider their investment allocations.
Foreign Investment Outflows Raise Concerns
The continued withdrawal of foreign capital has become a major concern for India’s financial markets. Foreign investors have increasingly shifted their money towards other markets where they see better returns and more attractive investment opportunities.
According to a November 5 report, foreign holdings in Indian stocks have fallen to an all-time low of approximately 14 per cent.
Foreign portfolio investors withdrew around $18.9 billion from Indian equities in 2025 and more than $30 billion during 2026 so far, according to figures cited in the Inside India newsletter.
This trend has put additional pressure on the Indian stock market and the rupee. Market experts believe that improving India’s tax structure could help restore confidence among international investors.
Finance Minister Nirmala Sitharaman Open to Tax Changes
Finance Minister Nirmala Sitharaman has acknowledged concerns raised by domestic and international investors regarding capital gains taxation.
She has indicated that the government is willing to examine suggestions for changes in the taxation structure, including LTCG and Securities Transaction Tax.
The government is also discussing possible changes ahead of the Union Budget 2027-28.
Apart from removing LTCG tax for foreign investors, another proposal under consideration involves reducing the existing 12.5 per cent long-term capital gains tax rate.
There have also been discussions about allowing foreign investors to calculate taxable gains in dollar terms rather than Indian rupees.
This could address a concern faced by international investors who may earn profits in rupee terms but experience lower or negative returns when those investments are converted back into dollars because of rupee depreciation.
However, these proposals remain under consideration, and investors will have to wait for an official government announcement.
Will Removing LTCG Tax Bring Foreign Investors Back?
Market experts believe that removing or reducing LTCG tax could improve India’s attractiveness as an investment destination, but taxation is not the only factor influencing international investment decisions.
A lower tax burden would improve the post-tax returns available to foreign investors and make Indian equities more competitive against markets such as China, Taiwan and South Korea.
However, investors also compare company valuations, corporate earnings, currency movements and long-term economic growth prospects before allocating money to a particular country.
According to market experts quoted in recent reports, India’s relatively expensive stock valuations and slower corporate earnings growth have contributed to foreign investors looking for opportunities elsewhere.
Therefore, a tax reduction could improve investor sentiment, but it may not immediately reverse the trend of overseas selling.
Stock Market Valuations and Corporate Earnings Matter
Another important challenge for India is the valuation gap between its stock market and other emerging markets.