There has been growing buzz on Dalal Street over the possibility of the government considering cut in the long-term capital gains (LTCG) tax, amid sustained foreign investor outflows from the Indian stock market, which have already exceeded ₹2.34 lakh crore in 2026.
Against this backdrop, the Securities and Exchange Board of India (SEBI) has reportedly recommended that the government remove the LTCG tax imposed on foreign investors, two people with direct knowledge of the matter told Reuters.
SEBI has also proposed tax relief for domestic mutual fund investors, suggesting that they be exempt from LTCG tax when selling existing holdings to invest in new ones, the report said, citing the same sources.
Currently, foreign investors pay 12.5% LTCG tax on eligible equity investments held for more than 12 months. Short-term capital gains (STCG) on equity investments held for 12 months or less attract a 20% tax. Investors also pay securities transaction tax (STT) on trades and withholding tax on dividends.
Finance Minister Nirmala Sitharaman, speaking at the Bloomberg New Economy Forum in New Delhi last in mid-October, said she was keen to listen to discussions around STT as India seeks to attract capital inflows.
She declined to comment specifically on the possibility of any changes as the government prepares for the Union Budget due in February. However, she said it was healthy to have the debate and that she would be keen to hear the views being expressed.
Jefferies outlines three possible changes to LTCG tax rules
Global brokerage firm Jefferies has recently outlined three possible changes to equity LTCG rules: cutting both LTCG and short-term capital gains (STCG) tax rates for all investors; reducing LTCG tax only for foreign portfolio investors (FPIs); or allowing FPIs to calculate capital gains in US dollar terms to offset the impact of currency fluctuations.
The LTCG tax and STCG are less competitive than those of some global peers, potentially adding to the pressure on foreign investor sentiment and capital flows.
SEBI has said that transaction costs associated with investing in Indian equities are among the highest across jurisdictions.
FPIs outflows near ₹3 lakh crore
FPIs extended their selling spree in the Indian stock market, withdrawing another ₹34,843 crore in October. This came on top of the ₹35,857 crore worth of selling in September, according to NSDL data.
With the October outflows, total FPI withdrawals from Indian equities in 2026 have reached ₹2.91 lakh crore, surpassing the ₹1.66 lakh crore outflow recorded during the whole of 2025.
Bearish sentiment towards Asia’s third-largest economy has weighed on market performance, with the Nifty 50 falling 10% in 2026 and heading towards its biggest annual decline since 2011, when it crashed 24.62%.
The support provided by domestic mutual funds has helped cushion the market’s decline. Without their buying support, the fall could have been even steeper.
(With inputs from Reuters)
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