SEBI Calls for Removal of LTCG Tax for Foreign Investors Ahead of Budget
SEBI has proposed eliminating the long-term capital gains tax for foreign investors to enhance India's equity market appeal, amidst significant foreign capital outflows.
NEW DELHI, Nov 2: The Securities and Exchange Board of India (SEBI) has recommended that the government eliminate the long-term capital gains (LTCG) tax for foreign investors, according to sources familiar with the matter. This proposal aims to stimulate the country’s struggling equity markets, which have seen substantial foreign capital outflows recently.
Foreign investors have divested a record $31 billion from Indian stocks this year, prompting SEBI to act. The regulator also suggested that domestic mutual fund investors should be exempt from LTCG when they sell existing investments to reinvest in new ones. These recommendations come ahead of India’s annual budget in February but are not binding; the ultimate decision rests with the government.
SEBI’s outreach with foreign investors over the past two years has revealed a common concern regarding India’s tax regime. The current LTCG tax stands at 12.5% for securities held longer than a year, in addition to short-term capital gains tax of 20%, along with other transaction and dividend taxes. A source indicated that the aim of the proposals is to ease the initial tax burden on foreign investors, stating, “The proposals are aimed at reducing the upfront tax burden on foreign investors.”
Analysts agree that reducing capital gains taxes could enhance India’s attractiveness to foreign investors. Brokerage firm Jefferies noted that such a reduction could support portfolio inflows. IIFL estimates that eliminating the LTCG tax could boost foreign investors’ returns by approximately 2.3 percentage points.
India’s benchmark Nifty 50 index has declined by 4.8% over the past two years, in stark contrast to a 40% rise in the MSCI emerging market index. Meanwhile, returns from diversified domestic equity mutual funds have stagnated, with average returns from large-cap stock funds dropping by 1.6%, according to Morningstar.
To further encourage long-term investment in domestic mutual funds, SEBI has proposed that switching between mutual fund schemes should not be classified as a taxable sale if the units have been held for more than a year. This could help retain investor interest in the sector, which currently manages about ₹82.6 lakh crore in assets.
Sources
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