Market Regulator Urges Tax Changes as Foreign Investors Pull Out Billions

Dalal Street is seeing active discussion about whether the government will lower long-term capital gains tax as foreign investors continue to pull money out of the Indian stock market. Total foreign investor withdrawals from Indian equities reached ₹2.91 lakh crore in 2026 after hitting ₹34,843 crore in October and ₹35,857 crore in September, according to NSDL data.

Tax Changes

Two sources told Reuters that the Securities and Exchange Board of India has recommended removing the 12.5% long-term capital gains tax that foreign investors currently pay on eligible equity investments held for more than 12 months. The market regulator has also suggested giving tax relief to domestic mutual fund investors so they do not pay long-term capital gains tax when selling existing holdings to buy new ones. Foreign investors also pay a 20% tax on short-term capital gains for investments held for 12 months or less, alongside securities transaction tax on trades and withholding tax on dividends.

Market Impact

Global brokerage firm Jefferies recently outlined three possible changes to equity rules, including cutting tax rates for all investors, reducing rates only for foreign portfolio investors, or letting foreign investors calculate gains in US dollars to offset currency shifts. Finance Minister Nirmala Sitharaman said in mid-October at the Bloomberg New Economy Forum in New Delhi that she is keen to hear views on transaction costs, though she did not comment on specific changes ahead of the Union Budget in February. Market performance has dropped as the Nifty 50 fell 10% in 2026, heading toward its biggest yearly drop since 2011 when it crashed 24.62%, though buying support from domestic mutual funds has helped cushion the fall.

Context

Stock market regulators and finance ministries routinely review tax policies and transaction costs to keep capital markets competitive against global peers. Heavy selling by foreign institutional investors often puts downward pressure on local stock indices unless domestic buying provides strong counter-support.