Key Takeaways
- • SEBI has reportedly recommended that the government remove long-term capital gains (LTCG) tax on foreign investors in Indian equities, according to two people with direct knowledge of the matter cited by Reuters.
- • Foreign investors currently pay 12.5% LTCG on securities held more than a year and 20% short-term capital gains tax, on top of securities transaction taxes and dividend withholding taxes.
- • Foreign investors have sold a record $31 billion of Indian stocks this year, and Nifty 50 is down 4.8% over two years versus a 40% gain in the MSCI Emerging Markets index.
- • SEBI has also proposed exempting domestic mutual fund switches from LTCG when units have been held more than a year; Indian mutual funds manage 82.6 trillion rupees ($870.80 billion) in AUM.
- • The recommendations are non-binding pre-budget representations, with the final decision resting with the government ahead of the February budget.
Summary
The Securities and Exchange Board of India (SEBI) has recommended that the government remove the long-term capital gains tax imposed on foreign investors, two people with direct knowledge of the matter told Reuters. The proposal is part of pre-budget representations, is not binding, and leaves the final decision with the federal government ahead of the annual budget in February. Email queries to SEBI and the finance ministry were not answered, and the people spoke on condition of anonymity because the recommendations are private.
The move comes as India's equity market has lagged emerging market peers. The Nifty 50 has declined 4.8% over the past two years while the MSCI Emerging Markets index has risen 40%. Foreign investors have sold a record $31 billion of Indian stocks this year, and selling has put pressure on the rupee. SEBI has held scores of meetings with foreign investors over the last two years, and the sources said a consistent request has been changing how India taxes them. SEBI has said transaction costs for equity investing in India are among the highest across jurisdictions.
Investors currently pay 12.5% LTCG on securities held for more than a year and 20% short-term capital gains tax, in addition to securities transaction taxes and withholding taxes on dividends. Market commentators views on the proposal were broadly positive. Jefferies said in a note that any reduction in capital gains taxes could improve India's attractiveness to foreign investors and support portfolio inflows. IIFL estimates that scrapping the capital gains tax could lift foreign investors' returns by 2.3 percentage points. Samir Arora, founder and fund manager of Helios Capital Management, said India was one of the very few countries where foreign investors pay capital gains taxes, adding that correcting this anomaly would be welcomed. Gary Tan, portfolio manager at Allspring Global Investments, called scrapping long- and short-term capital gains taxes a clear positive, though he noted it would not address concerns that AI could erode India's labor cost arbitrage growth model.
For domestic investors, SEBI has reportedly proposed that switching from one mutual fund scheme to another should not be treated as a taxable sale if units have been held for more than a year, in an effort to keep retail investors invested. Returns from diversified domestic equity mutual funds have stagnated, with average large-cap fund returns down 1.6% over the period, according to Morningstar. Indian mutual funds hold 82.6 trillion rupees ($870.80 billion) in assets under management, with an average of 30 billion rupees flowing in monthly through systematic investment schemes. Vivek Rajpal, Asia macro strategist at JB Drax Honore, said this is probably the best time for such tax reforms, as they would help align India with other emerging markets amid more selective global capital.
The move comes as India's equity market has lagged emerging market peers. The Nifty 50 has declined 4.8% over the past two years while the MSCI Emerging Markets index has risen 40%. Foreign investors have sold a record $31 billion of Indian stocks this year, and selling has put pressure on the rupee. SEBI has held scores of meetings with foreign investors over the last two years, and the sources said a consistent request has been changing how India taxes them. SEBI has said transaction costs for equity investing in India are among the highest across jurisdictions.
Investors currently pay 12.5% LTCG on securities held for more than a year and 20% short-term capital gains tax, in addition to securities transaction taxes and withholding taxes on dividends. Market commentators views on the proposal were broadly positive. Jefferies said in a note that any reduction in capital gains taxes could improve India's attractiveness to foreign investors and support portfolio inflows. IIFL estimates that scrapping the capital gains tax could lift foreign investors' returns by 2.3 percentage points. Samir Arora, founder and fund manager of Helios Capital Management, said India was one of the very few countries where foreign investors pay capital gains taxes, adding that correcting this anomaly would be welcomed. Gary Tan, portfolio manager at Allspring Global Investments, called scrapping long- and short-term capital gains taxes a clear positive, though he noted it would not address concerns that AI could erode India's labor cost arbitrage growth model.
For domestic investors, SEBI has reportedly proposed that switching from one mutual fund scheme to another should not be treated as a taxable sale if units have been held for more than a year, in an effort to keep retail investors invested. Returns from diversified domestic equity mutual funds have stagnated, with average large-cap fund returns down 1.6% over the period, according to Morningstar. Indian mutual funds hold 82.6 trillion rupees ($870.80 billion) in assets under management, with an average of 30 billion rupees flowing in monthly through systematic investment schemes. Vivek Rajpal, Asia macro strategist at JB Drax Honore, said this is probably the best time for such tax reforms, as they would help align India with other emerging markets amid more selective global capital.
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