The Securities and Exchange Board of India (SEBI) has urged the government to remove the 12.5% long-term capital gains tax for foreign investors to reverse a record $31 billion outflow. The regulator also proposed tax-neutral switching for mutual fund investors to help stabilize domestic liquidity. These pre-budget recommendations aim to boost market sentiment after two years of underperformance, though the final decision rests with the central government.
The Securities and Exchange Board of India (SEBI) has submitted pre-budget proposals to the government, aimed at reversing the current stagnation in Indian equity markets. The regulator has requested the removal of the 12.5% long-term capital gains (LTCG) tax for foreign portfolio investors (FPIs). This measure is designed to address the record divestment of $31 billion witnessed throughout 2024, which has been a primary factor weighing on market sentiment and indices.
For domestic investors, SEBI has proposed a tax-neutral approach for mutual fund transactions. Currently, moving capital between different mutual fund schemes can often trigger an immediate tax liability if the holding period does not meet specific criteria. The proposed change would allow investors to switch between schemes without incurring immediate taxes, provided the units have been held for more than a year. The intention is to encourage long-term participation and wealth creation, discouraging investors from exiting the market simply to manage their tax liabilities.
The urgency for these reforms stems from a widening performance gap between India and global peers. While the MSCI Emerging Market index has recorded gains of approximately 40% over the past two years, the Nifty 50 has registered a decline of around 4.8%. Large-cap domestic funds have also faced challenges, with returns lagging behind global benchmarks. Early estimates from brokerage firms suggest that removing capital gains taxes could theoretically provide a 2.3 percentage point boost to investor returns, potentially making Indian equities more attractive to global capital.
Investors should note that these measures are currently recommendations and not enacted laws. The final decision rests with the Finance Ministry, which must balance these requests against the country's fiscal revenue targets. Furthermore, while tax relief could improve sentiment, the market continues to navigate broader macro-economic pressures. Factors such as the direction of US Treasury yields, fluctuations in global crude oil prices, and the volatility of the Indian rupee remain significant variables that could influence market direction, independent of tax policy adjustments.
The next important update will be the official announcements surrounding the Union Budget in February 2027. Investors may track government commentary regarding these specific tax proposals, as they will provide clarity on whether the administration intends to prioritize stimulating equity inflows through tax structural changes.