SEBI backs scrapping LTCG on foreign investments; high crude prices may still deter FPIs

New Delhi: The Securities and Exchange Board of India (SEBI) has suggested removing the Long-Term Capital Gains (LTCG) tax on equity investments by foreign investors as part of its pre-Budget representation to the Ministry of Finance. Moreover, the body has recommended tax-free switching between mutual fund schemes for domestic investors, provided that they have held the existing units for more than 12 months.

As per a report by Reuters, the recommendations submitted by SEBI ahead of the Union Budget 2027 are non-binding and depend on the government's approval.

SEBI's recommendations aim to attract more foreign investors to gain overseas capital while attempting to keep domestic investors invested in the equity market amid the slower performance of Indian equities in comparison to market peers. Substantial numbers of foreign investors have pulled back from the Indian equity market, selling around $31 billion worth of stocks.

The current rules mandate that a 12.5 per cent LTCG tax be paid by foreign investors on equity investments held for more than 12 months, whereas the Short-Term Capital Gains (STCG) tax on equities held for 12 months or less stands at 20 per cent. Meanwhile, overseas investors also have to pay Securities Transaction Tax (STT) on trades of eligible securities.

Scrapping LTCG would provide relief to investors and encourage them to continue buying Indian stocks. Foreign investors have time and again pointed out taxation as a major concern while investing in Indian equities.

Domestic investors, on the other hand, have to pay tax while switching between mutual fund schemes since the process is treated as the redemption of funds followed by fresh investments. As a result, investors have to pay tax on any capital gain even when they are simply transferring the funds to another scheme, which would then be considered a fresh investment.

SEBI's recommendations would ensure smooth switching between mutual fund schemes without the tax burden on the resulting capital gains.

While the tax relief may remove some burden from foreign investors, other factors are also at play behind the reluctance of overseas traders. Higher crude prices have increased India's import bills, fuelling inflation concerns. This, in turn, impacts dollar-denominated returns on Indian stocks.

Additionally, despite recent corrections in corporate earnings, foreign investors seem to remain cautious. Thus, lower crude prices and stronger earnings across companies may help bring back foreign investment flows.