SEBI Proposes Removal of Long-Term Capital Gains Tax Relief for Foreign Investors

The Securities and Exchange Board of India (SEBI) has urged the government to consider abolishing the long-term capital gains (LTCG) tax on equities, particularly for foreign investors. This proposal is part of ongoing efforts to rejuvenate India’s equity markets, which have lagged behind other emerging markets. SEBI has also suggested extending tax relief to domestic mutual fund investors, allowing them to switch between schemes without incurring LTCG tax.

The recommendations come ahead of the annual Union Budget scheduled for February. However, these suggestions are advisory, and the final decision rests with the government. SEBI’s push for tax reform follows a significant withdrawal of $31 billion by foreign investors from Indian stocks this year, as domestic market returns have remained lackluster.

Stock Market Turmoil

Indian equities have struggled compared to their emerging market peers over the past two years. Foreign investors have pulled out substantial funds, while retail investors have increasingly turned to overseas investments. SEBI’s proposals are a response to concerns raised by foreign investors regarding India’s tax policies, which they view as a barrier to investment.

Currently, investors face a 12.5% LTCG tax on securities held for over a year, alongside a 20% tax on short-term capital gains. These taxes, combined with transaction and withholding taxes, contribute to high investment costs in Indian equities. Brokerage firm Jefferies noted that reducing capital gains taxes could enhance the attractiveness of Indian stocks to foreign investors, potentially increasing portfolio inflows.

The underperformance of Indian equities has also impacted domestic investors. The benchmark Nifty 50 index has declined by 4.8% over the past two years, while the MSCI emerging markets index has risen by 40%. Returns from diversified domestic equity mutual funds have been similarly disappointing, with large-cap mutual funds delivering average returns of -1.6%. To encourage continued investment in domestic mutual funds, SEBI has proposed that transfers between mutual fund schemes not trigger tax liabilities for investors who have held their original units for over a year. The domestic mutual fund industry currently manages assets worth Rs 82.6 trillion ($870.80 billion).