Sebi Supports Removing LTCG Tax for Foreign Investors

The Securities and Exchange Board of India (Sebi) has expressed support for the removal of the long-term capital gains (LTCG) tax imposed on foreign investors, according to recent reports. This potential policy change aims to attract increased foreign portfolio investments into Indian equities, addressing significant outflows and boosting market stability.

Background on LTCG Tax and Foreign Investment

Since its introduction, the LTCG tax on equities has been a point of contention for foreign portfolio investors (FPIs) and market observers alike. Originally set at 10%, this tax was raised to 12.5% in 2024, a move seen as potentially affecting the attractiveness of Indian markets to global investors.

Foreign portfolio investors have been withdrawing significant amounts from Indian equities throughout 2026, with outflows surpassing ₹3 lakh crore, including ₹44,100 crore in October alone. These withdrawals have sparked concerns, given India’s reliance on foreign capital to support its current account deficit and fund economic growth.

Why Sebi Supports LTCG Tax Removal

Sebi’s endorsement comes amid growing pressure to enhance India’s investment climate for foreign investors. Removing the LTCG tax could make Indian equities more competitive and appealing compared to other emerging markets with fewer or no such taxes on foreign capital gains.

Market experts believe that scrapping the LTCG tax might not be a silver bullet for reversing outflows but would be a significant step towards making the Indian equity market more investor-friendly. Sebi’s backing signals regulatory openness to reforms aimed at increasing foreign participation.

Potential Implications of the Tax Removal

Should the government decide to eliminate the LTCG tax for foreign investors, it could result in several positive outcomes:

• Increased Foreign Portfolio Inflows: A tax-free environment on long-term capital gains would likely lure back foreign investments, improving liquidity and market depth.
• Improved Market Confidence: Positive regulatory signals could strengthen investor confidence and contribute to market stability during periods of volatility.
• Support for Current Account Financing: Foreign capital inflows are crucial for financing India’s current account deficit, and this move could help mitigate funding pressures.

However, it is important to recognize that taxation is only one aspect influencing foreign investors. Other factors like global economic conditions, domestic policies, and geopolitical risks also play crucial roles in investment decisions.

What Investors Should Watch Next

Investors are advised to monitor official announcements from the government and Sebi regarding potential tax reforms closely. Key indicators to watch include:

• Government budget proposals or finance ministry statements addressing LTCG tax policy.
• Sebi’s formal policy updates or consultations on capital gains taxation.
• Foreign portfolio investment trends following any regulatory changes or news.
• Broader economic indicators impacting foreign investor sentiment toward Indian equities.

While the removal of LTCG tax for foreign investors holds promise for revitalizing capital inflows, cautious investor scrutiny and ongoing evaluation of macroeconomic factors remain essential for informed decision-making.