The Securities and Exchange Board of India (SEBI) has recommended that the government remove the long-term capital gains (LTCG) tax imposed on foreign investors, Reuters reported on Monday, November 2, citing two sources with direct knowledge of the matter. The markets regulator has also proposed tax relief for domestic mutual fund investors, suggesting they be exempt from LTCG tax if they sell existing holdings to invest in new ones.

Source: Reuters via The Hindu BusinessLine

12.5%Current LTCG tax rate on equities held for more than one year
$31 billionForeign investors' selling of Indian stocks so far this year, per the report
20%Current short-term capital gains tax rate on equities
Feb 2027Union Budget, ahead of which the recommendation has been made

The recommendations are part of SEBI's pre-Budget representations to the government ahead of the annual Union Budget in February and are not binding — a final call rests with the government, the report said. One of the sources said the proposals are aimed at reducing the upfront tax burden on foreign investors. The sources declined to be named because the recommendations, which had not been reported previously, are private. Email queries sent to SEBI and the federal finance ministry were not answered, Reuters said.

Source: Reuters via CNBC-TV18 on TradingView

SEBI's recommendations follow scores of meetings the regulator has held with foreign investors over the last two years as selling persisted and put pressure on the Indian currency, the report said. SEBI has said transaction costs associated with investing in equities in India are among the highest across jurisdictions: investors currently pay LTCG tax of 12.5% on securities held for more than a year and short-term capital gains tax of 20%, in addition to securities transaction tax on trades and withholding tax on dividends. India's benchmark Nifty 50 has declined 4.8% in the last two years while the MSCI emerging market index is up 40%, according to the report.

Source: Reuters via CNBC-TV18 on TradingView

The SEBI recommendation is a new step in a debate that was already under way: reports last week said the Centre was weighing a cut in the LTCG tax on shares ahead of Budget 2027-28 to revive stock market sentiment. No tax change has been announced, the existing LTCG rules remain in force, and any exemption would require a government decision, expected to be considered during the Budget exercise.

Source: ANI report via Indian Economic Observer

Recommendation, not a decision

SEBI has only recommended the change as part of its pre-Budget representations. The government has not accepted or announced it, and foreign and mutual fund investors continue to pay LTCG tax under the existing rules until any Budget announcement says otherwise.