SEBI Seeks Tax Cuts for Foreign, Domestic Investors

The Cliff News | 2 November 2026

The Securities and Exchange Board of India (SEBI) has recommended significant tax reforms, including the abolition of long-term capital gains (LTCG) tax on foreign investors and tax relief for domestic mutual fund investors, in a bid to revitalize the nation's underperforming equity markets. These proposals, submitted as part of the regulator's pre-budgetary representations, aim to make India a more attractive destination for global capital.

According to a Reuters report, SEBI's suggestions, shared by two sources with direct knowledge of the matter, include exempting foreign portfolio investors from LTCG tax on their equity holdings. Additionally, domestic mutual fund investors could see tax exemptions when transferring existing holdings to new schemes, provided the units have been held for over a year. These recommendations are being considered ahead of the Union Budget slated for February, though the ultimate decision rests with the government.

Addressing Market Underperformance

India's equity markets have lagged behind their emerging market counterparts for the past two years. This underperformance has led to a substantial outflow of foreign capital, with foreign investors offloading a record $31 billion worth of Indian stocks this year alone. Concurrently, overseas investments by retail investors have seen an increase, a trend attributed by Reuters to stagnant domestic market returns.

These proposals stem from extensive consultations SEBI has held with foreign investors over the last two years. The sustained selling pressure on Indian equities by foreign entities has also put strain on the Indian Rupee. A persistent demand from these investors has been a revision of India's taxation framework, as indicated by the sources privy to the recommendations.

“The proposals are aimed at reducing the upfront tax burden on foreign investors,” one of the sources stated, highlighting the direct intent behind the suggested changes. The sources chose to remain anonymous as these recommendations are part of SEBI's private pre-budget submissions and had not been publicly disclosed.

Enhancing Foreign Investor Appeal

SEBI has previously acknowledged that the transaction costs associated with equity investments in India are among the highest globally. Currently, foreign investors are subject to a 12.5% LTCG tax on securities held for over a year and a 20% short-term capital gains tax. They also face securities transaction taxes on trades and withholding taxes on dividends.

A reduction in capital gains taxes could significantly enhance the attractiveness of the Indian market for foreign investors, potentially bolstering portfolio inflows. Brokerage firm Jefferies noted in a recent report that such a move would be beneficial. Furthermore, IIFL estimates that the complete scrapping of capital gains tax could boost foreign investors' returns by an estimated 2.3 percentage points, as per the Reuters report.

Support for Domestic Mutual Fund Investors

Beyond attracting foreign capital, SEBI's recommendations also focus on retaining and encouraging domestic investors. The regulator has proposed tax relief for domestic mutual fund investors to foster continued investment. This measure is particularly relevant given the recent performance of Indian equities.

India's benchmark Nifty 50 index has seen a decline of 4.8% over the past two years. This contrasts sharply with the MSCI Emerging Markets Index, which has gained a substantial 40% during the same period, underscoring the underperformance of Indian stocks. Returns from diversified domestic equity mutual funds, a popular investment avenue for retail investors, have also stagnated. Data from fund research firm Morningstar indicates that average returns from large-cap focused funds have fallen by 1.6% over the last two years.

The proposed exemption for domestic investors would apply when switching between mutual fund schemes, provided their current units have been held for more than a year. The Indian mutual fund industry is a significant player, managing assets worth approximately Rs 82.6 trillion ($870.80 billion), with monthly investment schemes collectively bringing in about Rs 30 billion each month.