The Securities and Exchange Board of India (SEBI) has recommended scrapping long-term capital gains (LTCG) tax on equity investments by foreign investors and proposed tax relief for domestic mutual fund investors switching between schemes. The recommendations are aimed at attracting overseas capital and encouraging retail investors to remain invested in domestic mutual funds amid weak equity market returns.
According to a Reuters report on 2 November, the proposals have been submitted to the government as part of SEBI’s pre-Budget representations ahead of the Union Budget in February 2027. The recommendations are non-binding, and the final decision rests with the government.
SEBI proposes removing LTCG tax for foreign investors
Currently, foreign investors pay 12.5% LTCG tax on eligible equity investments held for more than 12 months. Short-term capital gains (STCG) on equity investments held for 12 months or less attract a 20% tax. Investors also pay securities transaction tax (STT) on trades and withholding tax on dividends.
SEBI has recommended removing the LTCG tax to reduce the tax burden on foreign investors and improve India’s attractiveness as an investment destination.
The proposal comes amid sustained foreign investor selling in Indian equities. Foreign investors have sold a record $31 billion worth of Indian stocks in 2026, while domestic markets have underperformed several emerging market peers over the past two years.
SEBI’s recommendations follow several meetings with foreign investors over the last two years, during which taxation emerged as a recurring concern. The regulator has also flagged that transaction costs associated with investing in Indian equities are among the highest across jurisdictions.
Mutual fund investors may get tax relief on scheme switches
SEBI has also proposed exempting domestic mutual fund investors from LTCG tax when they switch from one scheme to another, provided they have held the existing investment for more than a year.
Currently, switching between mutual fund schemes is treated as a redemption from the existing scheme and a fresh investment in another. Any resulting taxable capital gain attracts tax, even when investors are simply moving their money between schemes rather than withdrawing it from the market.
If accepted, SEBI’s proposal could allow investors to switch eligible holdings without an immediate LTCG tax liability. This would give investors greater flexibility to realign their portfolios without the tax implications associated with redemption.
The proposal is particularly relevant given the size of India’s mutual fund industry. Domestic mutual funds manage assets worth ₹82.6 trillion, while monthly investment schemes bring in an average of ₹3,000 crore.
What happens next?
Both proposals are part of SEBI’s pre-Budget recommendations and are yet to receive government approval. The Finance Ministry will have the final say on whether these tax changes are incorporated into the Union Budget 2027.
Until then, existing capital gains tax provisions will continue to apply to foreign equity investors and domestic mutual fund investors.
