SEBI Wants to Scrap LTCG Tax for Foreign Investors: Could This Bring Money Back to Indian Stock Markets?

India's stock market may be heading towards an important tax policy debate. The Securities and Exchange Board of India (SEBI) has reportedly recommended removing Long-Term Capital Gains (LTCG) tax on equity investments made by foreign portfolio investors (FPIs). The market regulator has also proposed tax relief for domestic mutual fund investors who sell their existing holdings to reinvest in other schemes. The recommendations come at a time when Indian equities have struggled to keep pace with global markets and foreign investors have continued to withdraw money. However, these proposals are not yet government policy. The final decision rests with the Finance Ministry.

Why Does SEBI Want to Remove LTCG Tax?

Foreign investors play an important role in India's stock market. Their investments provide liquidity, support market activity and contribute to overall investor confidence. However, taxation and transaction costs have remained concerns for overseas investors. Currently, long-term capital gains on listed equity shares and equity-oriented mutual funds are generally taxed at 12.5% on gains exceeding the applicable annual exemption limit, subject to tax rules. Short-term capital gains are taxed at 20% under the applicable provisions. SEBI's recommendation aims to reduce the tax burden on foreign investors and make Indian equities more attractive compared with other investment destinations. According to the Reuters report, foreign investors have sold approximately $31 billion worth of Indian stocks in 2026. This sustained selling has added pressure to the domestic market.

What Is LTCG Tax and How Does It Work?

Long-Term Capital Gains tax is charged on the profit earned when an investor sells an asset after holding it for a specified period. For listed equity shares and equity-oriented mutual funds, a holding period of more than 12 months generally qualifies as long-term. For example, if an investor purchases shares for ₹5 lakh and sells them for ₹7 lakh after the qualifying holding period, the ₹2 lakh profit represents a capital gain. Applicable tax is calculated according to the prevailing rules and exemptions. Removing this tax for eligible foreign investors could improve their post-tax returns and potentially make Indian equities more competitive.

SEBI Also Proposes Relief for Mutual Fund Investors

The proposal is not limited to foreign investors. SEBI has reportedly recommended that domestic mutual fund investors should not face LTCG tax when switching from one mutual fund scheme to another, provided they have held the units for more than one year. Currently, switching between mutual fund schemes is generally treated as a redemption from one scheme and an investment in another, which can trigger capital gains tax. The proposed relief could give investors greater flexibility to move their money between schemes without an immediate LTCG tax liability, subject to the final rules. This could also encourage investors to remain within India's domestic mutual fund ecosystem.

Why Is This Recommendation Important for Indian Markets?

The timing of SEBI's proposal is significant. Indian equities have underperformed several emerging markets over the past two years. According to figures cited in the Reuters report, the Nifty 50 declined 4.8% during this period, while the MSCI Emerging Markets index gained around 40%. At the same time, foreign investors have continued to reduce their exposure to Indian stocks. Lower capital gains taxes could improve the attractiveness of Indian markets, potentially support foreign portfolio inflows and strengthen investor sentiment. However, tax changes alone cannot guarantee a market recovery. Corporate earnings, economic growth, global interest rates, currency movements and geopolitical developments will continue to influence investment decisions.

What Could Change for Businesses and Investors?

If the government accepts SEBI's recommendations, the impact could extend beyond stock market trading. • Foreign investment: Lower tax costs could make Indian equities more attractive to overseas investors. • Market liquidity: Higher foreign participation could support trading activity and market depth. • Mutual fund flexibility: Investors may find it easier to switch between schemes under the proposed exemption. • Investor confidence: A more competitive tax structure could improve sentiment towards Indian financial markets. However, these are potential outcomes, not guaranteed results. The proposals still need government approval and detailed implementation rules.

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The Road Ahead: Will the Government Accept SEBI's Proposal?

SEBI's recommendations have opened an important discussion about India's investment environment and tax competitiveness. The government will now have to weigh the potential benefits of attracting foreign capital against its broader tax and revenue considerations. The proposed mutual fund relief could also change how domestic investors manage their long-term investments. For now, investors should remember that no tax exemption has been implemented through this recommendation. The actual impact will depend on the government's decision and the final provisions announced.

“A strong market needs investor confidence, but sustainable growth needs a strong financial foundation.”

This article is for informational and educational purposes only. SEBI's reported recommendations are proposals and are not currently implemented tax changes. Investors should consult a qualified tax professional before making financial decisions.