Potential $5 Billion Inflow from LTCG Tax Revisions
Analysts suggest that changes to the Long-Term Capital Gains tax could marginally boost foreign investments in India, but challenges remain.
Foreign investors withdrew approximately $64 billion from Indian equities since October 2024.
The removal of LTCG could increase annual dollar returns for foreign investors by about 2.2 percentage points.
Analysts indicate that factors like oil prices and currency stability are critical for attracting foreign investment.
Recent analysis by JM Financial indicates that eliminating the Long-Term Capital Gains (LTCG) tax for foreign institutional investors (FIIs) could lead to an influx of $3 to $5 billion in fiscal year 2028. This comes in light of the significant $64 billion that has been withdrawn from Indian equities since October 2024. The brokerage emphasizes that while tax relief may enhance returns, it is not the sole factor influencing foreign investment decisions.
The Indian government is currently reviewing its capital market tax policies, seeking input from investors and experts regarding the LTCG and securities transaction tax (STT). Reports suggest that the Securities and Exchange Board of India (Sebi) has recommended the removal of LTCG for foreign investors, although the final decision lies with the government ahead of the upcoming February budget.
Currently, foreign investors face a 20% short-term capital gains tax and a 12.5% LTCG on listed equities, calculated based on rupee gains rather than dollar gains. This structure can lead to situations where investors incur tax liabilities despite experiencing dollar losses due to currency depreciation. JM Financial estimates that removing the LTCG could improve the annual dollar return for foreign investors by approximately 2.2 percentage points, potentially making Indian equities more attractive.
However, analysts caution that tax reforms alone may not be sufficient to draw foreign capital back to India. They highlight that external factors such as oil prices and currency stability play a significant role in investment decisions. Historical data shows that elevated crude oil prices often correlate with foreign selling, while lower prices tend to encourage positive inflows. Thus, while tax adjustments could enhance India's appeal, they may not be enough to offset broader economic concerns.
Looking ahead, if the proposed tax changes are implemented and global market conditions improve, sectors heavily favored by FIIs, such as financials and energy, are expected to benefit first. JM Financial projects that if Brent crude prices stabilize between $100 and $115, India could see $10 to $15 billion in FII inflows in FY28, with potential for even higher inflows under favorable scenarios. The government faces the challenge of balancing tax relief with fiscal responsibility to maintain investor confidence and market stability.
