Market Regulator Proposes Scrapping Long-Term Capital Gains Tax for Foreign Investors

India's market regulator has proposed removing the long-term capital gains tax on foreign investors to revive underperforming equity markets. Two sources with direct knowledge of the matter said the Securities and Exchange Board of India made the recommendation ahead of the annual federal budget in February. The proposals are not binding and the final decision rests with the government. Foreign investors have sold a record 31 billion dollars in Indian stocks this year as returns have stagnated.

## Mutual Funds

The Securities and Exchange Board of India also suggested tax relief for domestic mutual fund investors. Under the proposal, investors would be exempt from the tax if they sell existing holdings to invest in new ones. The regulator recommends that switching from one mutual fund scheme to another should not count as a taxable sale if units are held for more than a year. Indian mutual funds hold 82.6 trillion rupees in assets under management, with an average of 30 billion rupees flowing in monthly. Brokerage firm Jefferies noted that lowering capital gains taxes could improve market attractiveness, while IIFL estimates scrapping the tax could lift foreign returns by 2.3 percentage points.

Context

Tax policies heavily influence where global institutional investors choose to park their funds across emerging markets. Regulators often review such fiscal burdens when domestic bourses face prolonged foreign capital outflows and sluggish returns compared to global peers.