SEBI Backs Removal of Long-Term Capital Gains Tax for Foreign Investors to Attract FPI Inflows

The Securities and Exchange Board of India (SEBI) has recommended that the government remove the 12.5% long-term capital gains (LTCG) tax on foreign portfolio investors (FPIs) investing in Indian equities, according to a Reuters report published on November 2, 2026. The recommendation comes as India faces sustained foreign investor selling, with overseas funds increasingly looking at other emerging markets for investment opportunities.

SEBI has also proposed a separate tax relief measure for domestic mutual fund investors. Under the reported proposal, investors could switch from one mutual fund scheme to another without triggering LTCG tax, provided they have held the original investment for more than a year. Neither proposal has become law. The government will make the final decision, potentially as part of the Union Budget 2027-28.

Key Takeaways

• SEBI has recommended removing the 12.5% LTCG tax on equity investments by foreign portfolio investors.
• The proposal aims to make Indian markets more attractive to overseas investors.
• Foreign investors have reportedly sold a record $31 billion worth of Indian stocks in 2026.
• SEBI has separately proposed LTCG relief for domestic mutual fund investors switching schemes after holding units for more than a year.
• The recommendations are non-binding and require government approval.
• The Union Budget 2027-28 could provide an opportunity for the government to announce a decision.
• The existing 12.5% LTCG tax remains applicable until any change is officially approved.

What Has SEBI Recommended on LTCG Tax?

According to two sources cited by Reuters, SEBI has recommended that the government eliminate long-term capital gains tax on equity investments made by foreign portfolio investors.

Currently, FPIs pay 12.5% LTCG tax on eligible listed securities held for more than 12 months. They are also subject to short-term capital gains tax, securities transaction tax and applicable taxes on dividend income.

SEBI’s recommendation is intended to reduce the tax burden associated with investing in Indian equities.

The regulator’s proposals follow multiple consultations with foreign investors over the past two years. During these discussions, overseas investors reportedly identified India’s tax structure and transaction costs as factors affecting the attractiveness of its equity markets.

The recommendations have been submitted as part of the regulator’s pre-Budget representations. They are not binding on the government, which retains the authority to decide whether to change the tax rules.

Why Does SEBI Want to Remove LTCG Tax for Foreign Investors?

The recommendation comes amid sustained foreign portfolio investor outflows from Indian equity markets.

Foreign investors have reportedly sold a record $31 billion worth of Indian stocks in 2026. Their withdrawals have added pressure to the domestic market and contributed to concerns about foreign capital flows and currency stability.

SEBI’s consultations suggest that taxation is one of several factors influencing overseas investment decisions.

Foreign investors compare markets based on multiple considerations, including:

• Capital gains taxation.
• Securities transaction costs.
• Currency movements and exchange-rate risks.
• Corporate earnings growth.
• Market valuations.
• Global interest rates and investment opportunities.

India’s equity market has also underperformed several emerging-market peers over the past two years.

According to Reuters, the Nifty 50 declined 4.8% over the two-year period, while the MSCI Emerging Markets Index gained 40%.

Reducing the tax burden could improve the post-tax returns available to foreign investors. However, taxation is only one part of the investment decision, and removing LTCG tax alone cannot guarantee that foreign capital will return.

How Much Tax Do Foreign Investors Currently Pay?

Under the existing tax structure, foreign portfolio investors face different tax rates depending on how long they hold their investments.

Type of capital gain	Current tax rate
Long-term capital gains on eligible listed equities	12.5%
Short-term capital gains on eligible listed equities	20%

<text color=”secondary” size=”xs”>Rates shown are under the current equity capital-gains framework and exclude applicable surcharge and cess. Tax treatment can vary by investor and instrument.</text>

Long-term capital gains generally apply when listed equity shares are held for more than 12 months and meet the relevant conditions.

The 12.5% rate was introduced in the Union Budget 2024, replacing the earlier 10% rate.

SEBI’s reported recommendation would remove the LTCG tax for foreign investors if the government accepts it. It does not automatically mean that short-term capital gains tax or other transaction-related taxes would also disappear.

SEBI Also Proposes Tax Relief for Domestic Mutual Fund Investors

Alongside the foreign investor proposal, SEBI has reportedly recommended a change that could benefit domestic mutual fund investors.

The regulator wants investors to be able to switch from one mutual fund scheme to another without triggering LTCG tax, provided the original units have been held for more than a year.

Under the current framework, switching from one mutual fund scheme to another is generally treated as a redemption of the existing investment followed by a fresh purchase.

This can trigger capital gains tax even when investors are not withdrawing money from the mutual fund industry.

For example, consider an investor who holds units in one equity mutual fund for more than a year and wants to move the investment into another scheme.

Under the existing framework, the redemption can create a taxable capital gain. Under SEBI’s reported proposal, such a switch could potentially qualify for tax relief if the prescribed conditions are met.

The proposal is intended to encourage investors to remain invested in domestic mutual funds instead of withdrawing money because of the tax cost associated with switching schemes.

However, the precise eligibility conditions, limits and implementation rules have not been announced.

Why the Government May Consider the Proposals in Budget 2027-28

The recommendations arrive several months before the Union Budget 2027-28, expected in February 2027.

The government has been exploring ways to make Indian financial markets more attractive to foreign capital.

However, removing LTCG tax for foreign investors presents a policy challenge: maintaining tax parity between domestic and overseas investors.

Currently, domestic investors and foreign portfolio investors are both subject to the 12.5% LTCG rate on eligible equity investments, although their tax treatment and exemptions can differ.

A complete exemption for foreign investors could raise questions about whether domestic investors should receive similar benefits.

The government must also consider the possibility of round-tripping, in which domestic money is routed through foreign entities to obtain tax advantages.

These concerns could influence the final design of any exemption.

A report by Business Today on October 27, 2026, said the Finance Ministry was examining options for LTCG relief and that a decision could come through the 2027-28 Budget.

India Has Already Removed LTCG Tax on Government Securities for FPIs

The latest recommendation follows an earlier tax change involving foreign investments in government securities.

In 2026, the government approved an exemption from capital gains tax for eligible foreign portfolio investments in government securities, with the change taking effect from April 1, 2026.

The measure was intended to encourage overseas investment in Indian government debt and attract more stable foreign capital.

However, the exemption for government securities is separate from the latest SEBI recommendation concerning equity investments.

The distinction is important because foreign investors participate in different segments of India’s financial markets, including government bonds, corporate debt and listed shares.

Removing tax on government securities does not automatically exempt equity investments from LTCG taxation.

What Could the Proposal Mean for Indian Stock Markets?

If the government accepts SEBI’s recommendation, foreign investors could retain a larger share of their long-term investment gains.

That could improve India’s attractiveness relative to markets with more favourable capital-gains tax treatment.

Brokerage firm IIFL estimates that removing capital gains tax could increase foreign investors’ returns by approximately 2.3 percentage points, according to Reuters.

However, the impact on actual investment flows would depend on other market conditions.

Foreign investors also consider earnings growth, company valuations, currency stability, interest rates and the relative performance of competing markets.

For domestic mutual fund investors, the proposed switching exemption could reduce the tax friction involved in moving between schemes. It could make portfolio rebalancing easier if the government adopts the recommendation.

Neither proposal guarantees higher stock prices or better investment returns.

The Bigger Picture

SEBI’s recommendations reflect India’s efforts to strengthen its position as an international investment destination while supporting domestic participation in equity markets. Foreign portfolio investors provide capital and liquidity, while domestic mutual funds have become an important source of steady investment through systematic investment plans.

The two proposals address different parts of the investment ecosystem. Removing LTCG tax for foreign investors could improve overseas investors’ post-tax returns, while allowing tax-free mutual fund switching could encourage domestic investors to remain invested. The government’s challenge will be balancing these incentives with tax revenue, fairness between investor categories and safeguards against misuse.

Looking Ahead

The next major development will be the Finance Ministry’s response to SEBI’s recommendations. The proposals could be considered during preparations for the Union Budget 2027-28, but the government has not committed to accepting them. Investors should continue to follow the existing tax rules until an official announcement or legislative change is made.

If approved, the measures could change how foreign investors evaluate Indian equities and how domestic investors manage mutual fund portfolios. However, the broader recovery of foreign investment will also depend on market valuations, corporate earnings, currency conditions and global capital flows. The final policy design will determine how much relief investors actually receive.

Frequently Asked Questions

1. What has SEBI recommended regarding LTCG tax for foreign investors?

SEBI has reportedly recommended removing the 12.5% long-term capital gains tax on equity investments made by foreign portfolio investors. The proposal has been sent to the government and requires approval.

2. Has the government removed LTCG tax for foreign investors?

No. The 12.5% LTCG tax on eligible equity investments by foreign portfolio investors remains applicable. SEBI’s recommendation is not yet law.

3. Why does SEBI want to remove LTCG tax for FPIs?

The regulator wants to make Indian equity markets more attractive to foreign investors amid substantial overseas fund withdrawals. Lower taxes could improve post-tax returns and potentially support investment inflows.

4. What is SEBI’s proposal for domestic mutual fund investors?

SEBI has reportedly proposed allowing investors to switch from one mutual fund scheme to another without triggering LTCG tax, provided the original units have been held for more than a year. The proposal is not yet approved.

5. When could the government decide on the LTCG proposal?

The government could consider the recommendation during the Union Budget 2027-28 process, expected in February 2027. No final decision or implementation date has been announced.

6. How much have foreign investors withdrawn from Indian stocks in 2026?

Foreign investors have reportedly sold a record $31 billion worth of Indian stocks in 2026, according to the Reuters report published on November 2.

7. Will removing LTCG tax automatically increase Indian stock prices?

No. Removing the tax could improve post-tax returns and potentially support foreign investment, but stock prices also depend on company earnings, valuations, global markets, interest rates and currency movements.

8. Does the proposed FPI exemption also remove short-term capital gains tax?

No such change has been reported. The recommendation specifically concerns long-term capital gains tax. Existing short-term capital gains and other applicable taxes would remain unless the government announces separate changes.