The Securities and Exchange Board of India (SEBI) has proposed removing the 12.5% Long-Term Capital Gains (LTCG) tax on equity investments made by foreign institutional investors (FIIs) to attract overseas capital and support India's struggling stock markets.

AdvertisementThe Puranic

The proposal comes amid significant foreign investor withdrawals and weaker performance of Indian equities compared with several emerging markets. Foreign Portfolio Investors (FPIs) have reportedly withdrawn a record $31 billion from Indian equities, putting additional pressure on the domestic market and the rupee.

SEBI has also recommended tax relief for domestic mutual fund investors. Under the proposal, investors could receive an LTCG tax exemption when selling or switching existing mutual fund holdings to reinvest in other schemes. The move aims to reduce tax-related barriers to portfolio reallocation and encourage long-term domestic investment.

Foreign investors currently face multiple costs, including 12.5% LTCG tax, 20% Short-Term Capital Gains (STCG) tax, Securities Transaction Tax (STT) and applicable taxes on dividend income. Removing LTCG tax could improve India's competitiveness as an investment destination.

However, the proposals are not final decisions. SEBI can only make recommendations, while the Ministry of Finance has the authority to approve or reject them.

The proposals are being considered ahead of the upcoming Union Budget. The government will have to balance the potential benefits of attracting foreign capital and encouraging domestic investment against the possible loss of tax revenue.