The Securities and Exchange Board of India has recommended that the government scrap the long-term capital gains (LTCG) tax on foreign investors and offer tax relief to domestic mutual fund investors, according to a Reuters report published on Monday citing two people with direct knowledge of the matter. The proposals, made as part of SEBI’s pre-Budget representations, come months before the Union Budget in February and are aimed at reviving India’s underperforming equity markets.
Under the proposal, foreign investors would be exempted from the 12.5 per cent LTCG tax that currently applies to equity investments held for more than one year. Foreign investors currently also pay 20 per cent short-term capital gains tax, securities transaction taxes and withholding taxes on dividends, a stack of levies that fund managers have long cited as a drag on India’s competitiveness against other emerging markets.
The second proposal concerns domestic mutual fund investors. SEBI has suggested that investors switching between schemes should not face LTCG tax when they sell holdings kept for more than a year in order to reinvest in new schemes — in effect, treating a switch as a continuation of the investment rather than a taxable sale. For millions of retail investors who rebalance their portfolios, that change would remove a real friction in how mutual funds are used.
The context is a difficult year for foreign flows. Foreign investors have withdrawn approximately 31 billion dollars from Indian equities so far in 2026, and market returns have lagged, even as domestic mutual fund inflows have stayed resilient. SEBI’s recommendations follow scores of meetings with foreign investors over the last two years, according to the report, and reflect a recognition that tax is one of the few levers the regulator can press quickly.
It is important to be clear about what this is — and is not. The recommendations are part of private pre-Budget representations, they are not binding, and the final decision rests with the government. Finance Minister Nirmala Sitharaman has previously indicated openness to suggestions on capital gains taxation during pre-Budget consultations, without committing to any change. No exemption has been announced, and existing LTCG rules remain in force.
Market reaction, however, was immediate. Reports of the proposal, alongside a surge in Reliance Industries shares, helped lift the Sensex and Nifty nearly 2 per cent on Monday, in their best session in months. Analysts cautioned that tax relief alone will not reverse foreign outflows — earnings growth, valuations and currency stability matter more — but welcomed the direction of travel.
If accepted, the changes would be among the most significant tax moves for capital markets in recent years. If rejected, they will still have served as a signal: the regulator believes India’s tax treatment of long-term capital is now part of the problem. The Budget in February will give the answer.
