Global brokerage Jefferies has suggested that lowering long-term capital gains tax could help reverse the $110 billion in foreign capital outflows seen since April 2025. With Indian large-cap stocks currently trading at a valuation discount to mid-caps, investors may track whether the government considers such tax incentives to improve market competitiveness.
Global brokerage Jefferies has pointed to a potential shift in tax policy as a key factor that could help bring foreign investors back to the Indian stock market. According to their latest analysis, the Indian equity market has faced a significant withdrawal of funds, with nearly $110 billion leaving the system via foreign portfolio investors, private equity firms, and promoters since April 2025. This large-scale exit has placed considerable pressure on the Indian rupee and dampened market sentiment.
Foreign funds are currently underweight on Indian stocks, holding 0.3 percentage points less exposure than their historical average of 2.2 percentage points over the last decade. This positioning suggests that if the investment environment becomes more favorable, there is room for significant capital to return. The brokerage highlights that reducing long-term capital gains tax—the tax levied on profits made from selling assets held for over a year—could act as a catalyst to reignite interest from institutional investors.
Financials, which have historically been a favorite for foreign investors, have seen the largest selling pressure with $16 billion in net outflows between October 2024 and September 2026. Other sectors like information technology and consumer staples have also faced heavy selling, with roughly $10 billion exiting from each. Jefferies identifies these sectors as currently oversold, suggesting that large-cap stocks may now offer better value than mid-cap stocks, which have held up relatively better. Large-caps are currently trading at a 23 per cent valuation discount compared to mid-caps, which is wider than the 20 per cent gap usually seen in the past.
However, the government faces a complex decision. Long-term capital gains tax and Securities Transaction Tax collections were a significant contributor to the exchequer, accounting for 8 per cent of total direct tax collections in the 2025 fiscal year. Any reduction in these rates would likely create a revenue gap that the government would need to address through other fiscal measures. While discussions regarding potential tax adjustments have been reported, there has been no official legislative change.
Investors may monitor official budget updates and government statements regarding tax policy for any potential changes. The effectiveness of such a move will also depend on broader global factors, such as interest rate trends and how India compares to other emerging markets in terms of economic growth and valuation.