Sebi proposes scrapping LTCG tax for foreign investors in pre-Budget push

The Securities and Exchange Board of India (Sebi) has recommended that the government scrap long-term capital gains (LTCG) tax for foreign investors and provide tax relief to domestic mutual fund investors, as the regulator looks to make Indian markets more attractive and encourage investment, reported news agency Reuters.

The recommendations are part of Sebi's pre-Budget representations to the government, with the annual Union Budget scheduled to be presented in February. The proposals are not binding, and the final decision rests with the government.

The move comes at a time when Indian equities have underperformed emerging market peers and foreign investors have stepped up selling. Overseas investors have sold a record $31 billion worth of Indian stocks so far in 2026, while investments by Indian retail investors in overseas markets have also increased as domestic returns have stagnated.SEBI WANTS LTCG TAX REMOVED FOR FOREIGN INVESTORS

Sebi has recommended removing the long-term capital gains tax imposed on foreign investors to reduce the tax burden associated with investing in Indian equities.

Currently, investors pay 12.5% LTCG tax on securities held for more than a year. Short-term capital gains are taxed at 20%. These taxes are in addition to securities transaction tax on trades and withholding taxes on dividends.

The regulator has previously said that transaction costs associated with investing in Indian equities are among the highest across jurisdictions. The latest recommendations follow several meetings Sebi has held with foreign investors over the past two years as sustained selling put pressure on the domestic market and the Indian currency.

One of the sources familiar with the recommendations told Reuters: "The proposals are aimed at reducing the upfront tax burden on foreign investors."

The recommendations follow consistent feedback from foreign investors that India's tax structure needs to change. However, the proposals have not yet been made public as they form part of Sebi's private pre-Budget representations.

Brokerage firm Jefferies said earlier this week that any reduction in capital gains taxes could improve the attractiveness of Indian markets for foreign investors and support portfolio inflows. IIFL estimates that scrapping capital gains tax could increase foreign investors' returns by 2.3 percentage points.RELIEF PROPOSED FOR DOMESTIC MUTUAL FUND INVESTORS

Sebi has also recommended tax relief for domestic mutual fund investors who switch from one scheme to another.

Under the proposal, switching from one mutual fund scheme to another should not be treated as a taxable sale if the investor has held the units for more than a year. This would allow investors to move between schemes without triggering LTCG tax, potentially encouraging them to remain invested in domestic mutual funds.

The recommendation comes amid weak returns from domestic equity funds. According to data from fund research firm Morningstar cited in the Reuters report, average returns from funds investing in large-cap stocks have declined 1.6% over the past two years.

India's mutual fund industry currently manages assets worth Rs 82.6 trillion, or around Rs 82.6 lakh crore. Monthly investment schemes bring in an average of Rs 30 billion, or Rs 3,000 crore, every month.MARKETS LAG EMERGING MARKET PEERS

The recommendations come against the backdrop of weak performance in Indian equities compared with other emerging markets.

The Nifty 50 has declined 4.8% over the past two years, while the MSCI Emerging Markets index has gained 40% over the same period.

Foreign investors have sold a record $31 billion worth of Indian stocks so far in 2026. At the same time, overseas investments by Indian retail investors have surged as domestic market returns have remained subdued.

Sebi's recommendations are aimed at addressing some of the tax-related concerns raised by investors and improving the competitiveness of Indian markets.

However, these are proposals and do not amount to a change in the existing tax rules. The government will take the final call. - Ends