SEBI LTCG Tax Proposal could bring significant tax relief for foreign investors in the Indian stock market, as the market regulator has recommended removing long-term capital gains (LTCG) tax on foreign portfolio investors (FPIs).
The proposal also includes relief for domestic mutual fund investors who switch from one scheme to another after holding their investments for more than a year.
The recommendations come at a time when foreign investors have been withdrawing substantial amounts from Indian equities.
SEBI believes reducing the tax burden could make Indian markets more attractive to overseas investors and encourage greater participation.
However, these are recommendations submitted to the government and are not yet official changes in tax law. The final decision will rest with the Central Government.
What SEBI LTCG Tax Proposal Says
The Securities and Exchange Board of India (SEBI) has recommended that the government abolish long-term capital gains tax on equity investments made by foreign portfolio investors.
Under the existing system, foreign investors pay 12.5% LTCG tax on eligible securities held for more than one year.
They are also subject to short-term capital gains tax, securities transaction tax and applicable taxes on dividends.
SEBI has proposed removing the LTCG burden to reduce the overall cost of investing in Indian equities.
The regulator has also suggested that domestic mutual fund investors should not face LTCG tax when they switch from one mutual fund scheme to another, provided they have held the existing units for more than one year.
The objective is to encourage investors to remain invested in the domestic mutual fund market rather than discourage them through additional tax liabilities when changing schemes.
Why SEBI Wants to Reduce Tax on Foreign Investors
Foreign portfolio investors have been selling Indian equities amid concerns about market performance, valuations, global investment opportunities and currency movements.
According to reported market data, overseas investors have sold approximately $31 billion worth of Indian stocks in 2026.
The sustained outflows have also increased concerns about pressure on the Indian currency and the attractiveness of domestic equity markets.
SEBI has held several discussions with foreign investors over the past two years to understand their concerns.
Taxation and high transaction costs have emerged as important issues raised during these discussions.
The regulator has also highlighted that the overall transaction costs associated with investing in Indian equities are relatively high compared with several other markets.
The proposed tax changes are intended to reduce this burden and improve the competitiveness of Indian financial markets.
What Is the Current LTCG Tax Rate in India?
Under the existing tax system, long-term capital gains on eligible listed equity shares and equity-oriented mutual funds are taxed at 12.5% on gains exceeding the applicable annual exemption limit.
Short-term capital gains on eligible equity investments held for 12 months or less are generally taxed at 20%, subject to applicable conditions.
Foreign portfolio investors are also required to account for securities transaction tax and applicable taxes on dividend income.
The proposed exemption would change the tax treatment of long-term equity gains for foreign investors if the government accepts SEBI’s recommendation. Until then, existing tax provisions will continue to apply.
Mutual Fund Investors May Also Benefit
SEBI’s recommendations are not limited to foreign investors. Domestic mutual fund investors could also receive tax relief when transferring their investments between schemes.
Currently, switching from one mutual fund scheme to another is generally treated as a redemption of the existing units followed by a fresh investment.
This can trigger capital gains tax depending on the holding period and applicable tax rules.
SEBI wants investors to receive an exemption when they switch schemes after holding their existing units for more than one year.
Such a change could make portfolio rebalancing easier for long-term investors.
It may also encourage people to remain invested in mutual funds rather than withdrawing money because of tax considerations.
When Will the Government Take a Final Decision?
SEBI’s recommendations have been submitted ahead of the Union Budget 2027-28, which is expected to be presented in February 2027.
The proposals are non-binding, meaning the government is not required to accept them.
The Finance Ministry will take the final decision after considering the potential impact on government revenue, investors and the wider financial market.
For now, neither foreign portfolio investors nor domestic mutual fund investors should assume that the proposed exemptions have already come into effect.
If approved, the changes could represent an important shift in India’s capital gains taxation framework.
Until an official announcement or amendment is made, existing tax rates and rules will remain applicable.
