Jefferies Highlights Potential Benefits of LTCG Tax Cut for Foreign Investors
A potential reduction in long-term capital gains tax could entice foreign investors back to Indian markets, particularly benefiting large-cap stocks.
Foreign investors have withdrawn $37.5 billion from Indian equities over the last two fiscal years.
Jefferies identifies banks and energy companies as primary beneficiaries of a potential LTCG tax cut.
The Indian government is reassessing capital market levies amidst declining foreign investment.
Jefferies has indicated that a possible reduction in long-term capital gains (LTCG) tax could rejuvenate interest from foreign institutional investors (FIIs) in the Indian market. The brokerage notes that banks, energy firms, and other large-cap stocks are likely to benefit the most from such a tax adjustment. As foreign investors have been steadily exiting the Indian equity market, the potential tax cut could enhance sentiment and stabilize both the stock market and the Indian rupee.
The context of this situation stems from significant foreign outflows, with net withdrawals totaling $21 billion in fiscal year 2026 and an additional $16.5 billion up to October 2027. Over the past two years, the total outflow from foreign portfolio investors and other foreign entities has reached approximately $110 billion. This trend has left India underweight in global emerging market funds, with many funds currently holding less than their benchmark allocation to Indian equities.
Jefferies emphasizes that the current positioning of foreign investors in Indian stocks is relatively low. The brokerage suggests that easing the LTCG tax could lead to improved foreign portfolio investment (FPI) sentiment, similar to the recent uptick in debt inflows following tax relief for foreign investors in government securities. The report highlights that financial stocks, particularly major banks like HDFC Bank and ICICI Bank, along with Reliance Industries in the energy sector, could see a resurgence in investment if the tax environment becomes more favorable.
The implications of a potential LTCG tax cut are significant for the Indian economy, especially as the government seeks to balance fiscal responsibilities with the need to attract foreign investment. The government has been seeking feedback from investors and market experts regarding the LTCG and securities transaction tax (STT) as it reviews its capital market policies. Any reduction in tax rates could come at a cost, as LTCG collections have been substantial, contributing significantly to direct tax revenues.
Looking ahead, Jefferies outlines three potential approaches to reforming equity taxation: a blanket reduction in LTCG and STCG rates, targeted reductions for FPIs, or allowing FPIs to calculate gains in dollar terms for indexation benefits. The brokerage believes that if the government moves forward with an LTCG cut, large financial stocks and key sectors like energy and utilities are likely to be the first to benefit, potentially reversing the trend of foreign exits from the Indian market.
