Foreign institutional investor (FII) flows into Indian equities have remained volatile over the last year as global investors continue comparing India’s valuations, policy environment and after-tax returns with competing emerging markets.
Amid growing debate around ways to improve India’s attractiveness for global capital, several market experts believe rationalising long-term capital gains (LTCG) and short-term capital gains (STCG) taxes could help improve sentiment and make Indian markets more competitive.
However, while many market participants support tax rationalisation, some experts also caution that taxation alone may not be sufficient to revive sustained FII inflows unless broader macroeconomic conditions improve simultaneously.
Why experts believe lower capital gains tax can attract FIIs
Market experts said reducing LTCG and STCG rates could improve India’s relative attractiveness by increasing post-tax returns for foreign investors and narrowing the competitive gap with low-tax jurisdictions.
Santosh Meena, Head of Research at Swastika Investmart, said lower taxation would directly improve investor returns while enhancing India’s positioning among global markets.
“Reducing LTCG from 12.5% and STCG from 20% would attract FII inflows by improving post-tax returns on Indian equities. It makes India more competitive versus low or no-tax markets like Singapore, Hong Kong and UAE,” Meena said.
He added that lower taxes could help reduce what he described as the “India tax premium” while boosting net dollar returns for long-term foreign investors such as sovereign wealth funds and pension funds.
Meanwhile, Akshat Garg, Head Research & Product at Choice Wealth, also pointed out that India had already experienced a long phase of strong foreign participation when LTCG tax on equities was fully exempt between 2004 and 2018.
“Between 2004 and 2018, India exempted long-term capital gains on equities entirely. The Kelkar Committee pushed that exemption specifically to draw foreign institutional investors, and Indian markets emerged among the strongest emerging market stories globally,” Garg said.
According to Garg, the issue is not necessarily whether India should completely eliminate taxes, but whether current rates are calibrated appropriately to balance competitiveness with fiscal needs.
“A meaningful reduction on both long-term and short-term gains, enough to visibly narrow the gap with competing markets, would keep revenue on the table while signalling that India is serious about global capital competitiveness,” he said.
Currently, India levies 12.5% LTCG tax and 20% STCG tax on equities, while several competing financial hubs including Singapore, Hong Kong, UAE, Saudi Arabia and Qatar impose either zero capital gains tax or broad exemptions on securities investments. Experts believe this difference has increasingly become an important consideration for global investors allocating capital across emerging markets.
Vinit Bolinjkar, Head of Research at Ventura, also argued that taxation remains an important factor in global portfolio allocation decisions.
“India’s capital gains tax structure on listed equities remains among the more expensive in the Asia-Pacific peer set, and this has increasingly become a friction point in relative allocation decisions by foreign institutional investors,” Bolinjkar said.
He further stated that India’s earlier zero-LTCG regime demonstrated how tax competitiveness can materially influence foreign participation in domestic equity markets.
“The historical precedent is compelling. During the extended period when India had zero LTCG tax on listed equities, the country attracted consistently robust foreign inflows and witnessed significant deepening of equity market participation,” Bolinjkar added.
Why tax cuts alone may not be enough
While experts broadly acknowledged the benefits of tax rationalisation, some also warned that FIIs consider a much wider set of macroeconomic and structural variables before allocating money to emerging markets.
Pranay Aggarwal, Director and CEO of Stoxkart, said a reduction in LTCG and STCG rates would certainly be viewed positively, but alone may not materially alter foreign investment flows unless accompanied by stronger economic fundamentals.
“Global investors primarily allocate capital based on corporate earnings growth, currency stability, macroeconomic outlook, liquidity, policy continuity and relative valuations rather than taxation alone,” Aggarwal said.
He noted that concerns around moderating earnings growth, premium valuations relative to emerging market peers, rupee depreciation due to elevated crude oil prices and weaker foreign direct investment inflows continue to influence foreign portfolio investor sentiment toward India.
Aggarwal also pointed out that global capital is currently flowing heavily toward AI-driven investment themes, particularly in markets such as the United States, Taiwan, South Korea and China, where investors have access to large listed artificial intelligence ecosystems.
“At the same time, many competing emerging market economies either do not impose capital gains tax on foreign investors or provide broad exemptions, meaning India’s tax cuts would mainly narrow an existing disadvantage rather than create a major new advantage,” he said.
According to Aggarwal, sustained FII inflows are more likely to depend on a combination of stronger earnings recovery, improved external-sector stability, rupee resilience, higher FDI inflows and continued structural growth visibility, with tax rationalisation acting as a supportive policy measure rather than a standalone trigger.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
