SEBI Proposes Elimination of 12.5% LTCG Tax for Foreign Investors
In a strategic move ahead of the 2027 Union Budget, SEBI suggests abolishing the long-term capital gains tax on foreign equity investments to boost market appeal.
SEBI has recommended scrapping the 12.5% LTCG tax for foreign investors on equity investments held over 12 months.
The proposal aims to attract foreign capital and alleviate tax burdens for domestic mutual fund investors switching schemes.
The Finance Ministry will decide on the incorporation of these recommendations into the upcoming Union Budget.
The Securities and Exchange Board of India (SEBI) has made a significant recommendation to eliminate the long-term capital gains (LTCG) tax imposed on foreign investors for equity investments. This proposal, submitted as part of SEBI's pre-Budget representations for the Union Budget scheduled for February 2027, seeks to enhance India's attractiveness as an investment destination. Currently, foreign investors face a 12.5% LTCG tax on equity investments held for more than a year, alongside a 20% tax on short-term capital gains for investments held for less than 12 months.
This recommendation emerges against a backdrop of substantial foreign selling in Indian equities, with foreign investors divesting a record $31 billion in 2026. The Indian market has struggled to keep pace with several emerging market competitors over the past two years, prompting SEBI to address taxation as a critical concern raised during discussions with foreign investors. Additionally, the regulator highlighted that transaction costs for investing in Indian equities are among the highest globally, further discouraging foreign investment.
In addition to the LTCG tax recommendation, SEBI has proposed tax relief for domestic mutual fund investors. The regulator suggests exempting these investors from LTCG tax when they switch between mutual fund schemes, provided they have held their investments for over a year. Currently, switching is treated as a redemption, leading to potential tax liabilities even when investors are merely reallocating their funds within the market.
If implemented, this proposal could significantly enhance investor flexibility, allowing for portfolio adjustments without immediate tax consequences. Given the size of India's mutual fund industry, which manages assets worth ₹82.6 trillion, this change could encourage more active participation from domestic investors, particularly in a challenging market environment.
Both recommendations are pending government approval, with the Finance Ministry holding the final authority on whether these tax changes will be included in the Union Budget 2027. Until a decision is made, the existing capital gains tax provisions will remain in effect for both foreign equity investors and domestic mutual fund investors.
