Foreign Portfolio Investors Withdraw ₹1.43 Lakh Crore Since LTCG Tax Reintroduction
Foreign portfolio investors have sold shares worth ₹1.43 lakh crore in India since the reintroduction of the Long Term Capital Gains tax in 2018.
FPI net sales reached ₹1.43 lakh crore since 2018 due to LTCG tax.
In contrast, FPIs had net purchases of ₹7.4 lakh crore from 2005 to 2018.
Market experts suggest that merely reducing LTCG tax won't ensure a return of foreign investments.
Foreign portfolio investors (FPIs) have significantly altered their investment strategies in India, net selling shares worth ₹1.43 lakh crore since the reintroduction of the Long Term Capital Gains (LTCG) tax in 2018. This shift stands in stark contrast to the period from 2005 to 2018, when FPIs net purchased shares totaling ₹7.4 lakh crore, benefiting from the exemption of the LTCG tax during those years.
The reintroduction of the LTCG tax has led to a notable decline in FPI inflows, coinciding with a broader market correction. In 2023 alone, FPIs have offloaded shares valued at nearly ₹3 lakh crore, contributing to a 16% drop in the benchmark Sensex since the beginning of the year. Analysts emphasize that while lower taxes can incentivize foreign investments, other factors such as corporate earnings and market valuations also play critical roles in investment decisions.
India's taxation landscape poses unique challenges for foreign investors, who face multiple taxes on share transactions, including capital gains tax, Securities Transaction Tax (STT), and stamp duty. Vishad Turakhia, CEO of Equirus Securities, noted that the competitiveness of India's post-tax returns compared to other emerging markets is crucial. The LTCG tax's reintroduction, coupled with an increase to 12.5% in July 2024, has raised the cost of investing in Indian equities, potentially impacting portfolio allocations.
Historically, FPIs thrived during the LTCG exemption period, with net purchases averaging over ₹50,000 crore annually. The total market capitalization of listed companies has grown from ₹140 lakh crore in 2018 to ₹460 lakh crore today. However, since 2018, FPIs have been net sellers for four years, a stark contrast to the single year of net selling recorded between 2010 and 2018. Notably, 2020 and 2023 saw FPIs making substantial purchases of ₹1.7 lakh crore each.
Market analysts believe that while reducing the LTCG tax could provide a temporary boost to investor sentiment, it may not guarantee a sustained influx of foreign capital. For example, despite the government's announcement to eliminate capital gains tax on FPI investments in government securities in June 2026, recent outflows have occurred due to rising US bond yields and global economic uncertainties. The future of FPI investments in India remains contingent on a combination of tax policy adjustments and broader market conditions.
