Global brokerage Jefferies has suggested that India could reduce capital gains taxes to stop heavy foreign investment outflows. With over $16.5 billion leaving the market in the current fiscal year, the firm proposed options like broad tax cuts or dollar-based profit calculations. While such moves could help large-cap stocks in banking and energy, investors should note that these remain proposals with no official government confirmation.
Foreign Portfolio Investors (FPIs) have pulled approximately $16.5 billion out of Indian equities during the current fiscal year, adding to the $21 billion outflow recorded in the previous year. This consistent withdrawal has pressured the Indian rupee and created volatility in the domestic stock market. In response, global brokerage Jefferies has suggested that the Indian government could use tax policy as a tool to improve the attractiveness of the market for foreign capital.
Three Potential Policy Options
Jefferies has outlined three specific pathways that could theoretically help retain or attract foreign capital. The first option is a broad reduction in both Long-Term Capital Gains (LTCG) and Short-Term Capital Gains (STCG) tax rates for all investors. The second approach involves providing a targeted tax cut specifically for foreign investors to lower their entry barriers. The third proposal is to allow foreign investors to calculate their investment gains in US dollar terms, which would reduce the tax burden caused by currency depreciation.
Impact on Large-Cap Equities
If the government were to adopt any of these suggestions, the impact would likely be most visible in large-cap stocks. Financial institutions, such as banks, have historically been the primary entry point for foreign capital in India. Other sectors that have faced significant foreign selling, such as energy, utilities, and real estate, could also see a shift in sentiment if foreign investors return. A move to reduce taxes on profits could lower the cost of investing in India, making the country more competitive against other global investment destinations.
Fiscal and Global Challenges
While these proposals aim to support the market, there are clear risks and challenges. The primary concern is the fiscal impact; reducing tax rates means the government would collect less revenue, which must be balanced against the goal of market growth. Furthermore, domestic tax policy changes are only one piece of the puzzle. Investors should monitor how external factors, such as rising US Treasury yields and global economic uncertainty, continue to influence foreign investment decisions. Additionally, as of early November 2026, there has been no official announcement or confirmation from the government regarding these specific tax changes. The future direction of foreign flows will likely depend on a combination of domestic policy decisions and broader global macroeconomic conditions.