A recent analysis by IIFL Capital suggests that India’s capital gains tax on FPIs reduces annual returns by up to 2.4%. While the government introduced the Taxation and Other Laws (Amendment) Bill, 2026, on August 4 to boost foreign investment, the tax burden on equity investors remains a key topic for global funds tracking Indian market competitiveness.
The debate over India's tax structure for foreign investors has gained attention following a recent report from IIFL Capital. The analysis highlights that the current capital gains tax on Foreign Portfolio Investors (FPIs) is creating a significant hurdle, potentially reducing annual returns by up to 2.4 percentage points over a five-year period. This has sparked discussions on how such taxes affect India's competitiveness compared to other major global markets.
While brokerages are highlighting this friction in the equity market, the government has been taking steps to ease tax norms in other areas. In June 2026, the government issued an ordinance that removed capital gains and interest income taxes specifically for FPIs investing in government securities. Following this, on August 4, 2026, the government introduced the Taxation and Other Laws (Amendment) Bill, 2026, in the Lok Sabha. This bill aims to expand tax incentives to attract more foreign investment, particularly into sectors like data centers, electronics manufacturing, and offshore investment funds.
The core of the brokerage argument is that India remains an outlier among major financial hubs. Countries like the United Kingdom, Singapore, the United States, and the United Arab Emirates generally do not levy capital gains taxes on foreign portfolio investors. The IIFL report points out that the current Indian tax system, which includes long-term and short-term capital gains taxes, creates a 'structural friction.'
This friction is particularly felt by global funds in two ways. First, many funds are required to make daily tax provisions on unrealized gains, which lowers their net asset value even before any money is actually paid. Second, many overseas investors struggle to claim credits for these Indian taxes in their home countries, meaning the tax burden effectively disappears into the Indian treasury without a way to be offset by the investor. This has led to a wider performance gap between India-focused Exchange Traded Funds (ETFs) and their benchmarks compared to ETFs tracking other major global markets.
For investors, the situation presents a dual narrative. On one hand, the government is clearly focused on legislative reforms to make India a more attractive destination for global capital, as seen in the recent Amendment Bill. On the other hand, the brokerage report underscores the challenges that persist for equity investors specifically. The long-term impact on capital flows will depend on whether future policy adjustments address these equity-specific concerns or if the focus remains primarily on incentivizing direct and debt-related investments.