The Securities and Exchange Board of India (SEBI) has put forth a proposal to eliminate the long-term capital gains (LTCG) tax for foreign investors. This recommendation is part of Sebi’s pre-Budget submissions to the government, aimed at enhancing the appeal of Indian markets and stimulating investment. The annual Union Budget is set to be presented in February, and these proposals are advisory in nature, with the final decision resting with the government.

Currently, foreign investors are subject to a 12.5 per cent LTCG tax on securities held for over a year, while short-term capital gains are taxed at 20 per cent. These taxes are in addition to the securities transaction tax on trades and withholding taxes on dividends. Sebi has indicated that the transaction costs for investing in Indian equities are among the highest globally, which has been a concern for potential investors.

In light of sustained selling pressure on the domestic market, Sebi has engaged in multiple discussions with foreign investors over the past two years. One source familiar with the recommendations stated that the proposals aim to alleviate the initial tax burden on foreign investors, responding to consistent feedback about the need for a revised tax structure in India.

Tax Relief Proposed for Domestic MF Investors

In addition to the recommendations for foreign investors, Sebi has suggested tax relief for domestic mutual fund investors who switch between schemes. The proposal stipulates that switching from one mutual fund scheme to another should not be treated as a taxable event if the investor has held the units for more than a year. This change could encourage investors to remain committed to domestic mutual funds without incurring LTCG tax liabilities.

The backdrop for this recommendation is the underwhelming performance of domestic equity funds. Data from fund research firm Morningstar indicates that average returns from large-cap stock funds have decreased by 1.6 per cent over the past two years. The mutual fund industry in India currently manages assets worth Rs 82.6 trillion, or approximately Rs 82.6 lakh crore , with monthly investment schemes attracting an average of Rs 30 billion, or Rs 3,000 crore.

These proposals are intended to provide a more favourable environment for domestic investors, potentially leading to increased participation in the mutual fund sector. By removing the tax implications of switching schemes, Sebi aims to enhance investor flexibility and retention within the domestic market.

Performance of Indian Markets

The backdrop for Sebi’s recommendations includes the relatively poor performance of Indian equities in comparison to other emerging markets. The Nifty 50 index has seen a decline of 4.8 per cent over the past two years, while the MSCI Emerging Markets index has experienced a gain of 40 per cent during the same period.

This disparity has contributed to a record $31 billion worth of Indian stocks being sold by foreign investors in 2026 alone. Simultaneously, there has been a notable increase in overseas investments by Indian retail investors, reflecting a shift in focus as domestic market returns have stagnated.

Sebi’s recommendations are aimed at addressing tax-related concerns raised by investors, thereby improving the competitiveness of Indian markets. It is important to note that these recommendations do not constitute an immediate change in existing tax regulations. The government will ultimately determine the course of action regarding these proposals, which are intended to enhance the investment landscape in India.

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