Securities and Exchange Board of India Backs Foreign LTCG Removal

Securities and Exchange Board of India has recommended that the government remove long-term capital gains tax for foreign portfolio investors in Indian equities. The proposal targets a current 12.5% tax on gains from securities held for more than a year, but it is non-binding and requires government approval, potentially through the February Union Budget.

What has SEBI recommended on foreign investor LTCG tax?

SEBI has recommended exempting foreign portfolio investors, or FPIs, from long-term capital gains tax on Indian equities. Reuters reported the proposal, citing two sources with direct knowledge of the regulator's private pre-Budget representations. The stated aim is to reduce the upfront tax burden for foreign investors and improve the appeal of Indian equity markets.

The recommendation does not change the tax law at present. It is one of SEBI's suggestions to the government ahead of the Union Budget for 2027-28, scheduled to be presented in February. The government is not obliged to accept the regulator's recommendation, making any immediate conclusion about a tax cut premature.

What taxes do equity investors currently pay in India?

Investors currently pay 12.5% long-term capital gains tax on listed equity securities held for more than one year and 20% short-term capital gains tax on holdings sold within one year. These levies apply alongside securities transaction tax on trades and withholding taxes on dividends, adding to the overall cost of investing in Indian equities.

SEBI has reportedly flagged that transaction costs in Indian equities are among the highest across jurisdictions. The regulator's discussions with foreign investors over the past two years also identified tax reform as a recurring concern, as overseas selling put pressure on the Indian currency. IIFL estimated that eliminating capital gains tax could improve foreign investors' returns by 2.3 percentage points, though this is an estimate rather than a confirmed policy outcome.

How would SEBI's mutual fund switching proposal work?

SEBI has also proposed that domestic mutual fund investors should not face LTCG tax when moving proceeds from an existing scheme to a new scheme after holding the original units for more than a year. Under the reported proposal, a switch would not be treated as a taxable sale when the investor reinvests in another fund scheme.

The suggested relief is intended to help investors stay within domestic mutual funds without incurring a tax charge merely because they change schemes. As with the FPI recommendation, the proposal remains non-binding. Its final form, eligibility conditions and effective date would depend on a government decision rather than on SEBI's recommendation alone.

Why does the proposal matter for Indian equity markets?

The proposal matters because it addresses the tax and transaction-cost framework faced by overseas investors in Indian equities. Foreign investors have sought reforms to this structure, according to the reported feedback gathered by SEBI. A lower tax burden could alter the net return calculations made by FPIs when allocating money across markets.

However, the proposal would create a distinction between foreign investors and domestic retail investors if it were adopted as reported. In July 2026, the government told the Lok Sabha that there was no proposal under consideration to abolish equity LTCG tax and said the 12.5% rate applied equally to domestic retail investors and FPIs. That earlier position underlines why the Budget decision will be central.

Conclusion

SEBI's reported recommendation puts the 12.5% LTCG levy on foreign equity investors back into the policy debate. It also links foreign-investor tax relief with a separate proposal to make eligible mutual fund scheme switches tax-neutral, reflecting concerns about the cost of participation in Indian markets.

The next point to watch is the government's response in the February Union Budget. Until then, the existing LTCG, short-term capital gains tax, securities transaction tax and dividend withholding rules remain in place, while the scope and timing of any mutual fund switching relief are unresolved.