Proposal To Give Major Tax Relief To Foreign Investors, Recommend Ending India's 12.5% Capital Gains Tax

India's stock market has underperformed those of several other emerging economies over the past two years, a report says. NEW DELHI, (UrduPoint / Pakistan Point News - 4th Nov, 2026) India's Securities and Exchange Board (SEBI) has recommended major tax relief to attract foreign investors to the Indian stock market, including a proposal to abolish the 12.5% long-term capital gains tax on profits from shares held for more than one year. According to an exclusive Reuters report, SEBI has recommended in its pre-budget proposals that foreign portfolio investors (FPIs) be exempted from tax on long-term capital gains. The recommendation comes as India's stock market has underperformed those of several other emerging economies over the past two years, while foreign investors have withdrawn large amounts from Indian shares. Reuters, citing two sources directly familiar with the matter, reported that SEBI's proposals are part of confidential budget recommendations and that the Indian government will make the final decision. The recommendations are not legally binding on the government. Foreign investors sold shares worth approximately $31 billion in India's stock market during 2026, according to the report. SEBI held several meetings with foreign investors over the past two years to discuss investment costs, taxes and the difficulties of investing in India's financial markets. Sources said foreign investors have repeatedly complained that taxes and other costs on share trading in India are higher than in several global financial markets. One source told Reuters that the main purpose of the proposals is to reduce the initial tax burden on foreign investors and make investment in the Indian market more attractive. Under India's current system, a 12.5% long-term capital gains tax is imposed on profits from the sale of eligible shares held for more than one year, while a 20% short-term capital gains tax applies to shares sold within one year. Investors must also pay a securities transaction tax on share trading and withholding tax on dividends. If SEBI's proposal is approved, foreign investors could receive relief from the existing 12.5% tax on profits from shares held for more than one year. However, other taxes and transaction costs may remain in place. SEBI has also proposed an important measure for Indian citizens. Under the proposal, if a domestic investor transfers money from one mutual fund scheme to another after holding the investment for more than one year, the transfer would not be treated as a taxable sale. Under the current system, transferring money from one mutual fund scheme to another may, in some cases, be treated as the sale of shares and could attract capital gains tax. SEBI believes the concession would encourage investors to retain their investments and move funds into better-performing schemes. Assets under management by Indian mutual funds are estimated at approximately 82.6 trillion Indian rupees, or more than $870 billion. According to Reuters, India's benchmark Nifty 50 index has fallen 4.8% over the past two years, while the MSCI Emerging Markets Index rose 40% during the same period. The average performance of domestic mutual funds investing in large Indian companies has also been affected. Morningstar data showed that the average returns of funds investing in large-cap shares declined by 1.6%. Experts said reducing taxes for foreign investors could increase their post-investment returns, but tax relief alone cannot guarantee the return of foreign investment. Corporate earnings, share prices, the value of the Indian rupee and global investment trends are also important factors. Reuters reported that financial institution IIFL estimates that abolishing the capital gains tax could increase foreign investors' returns by approximately 2.3 percentage points. Financial experts said India would also need to review costs other than taxes associated with share trading to become more competitive for global investment. SEBI's recommendations were sent to the government ahead of India's annual budget, which is scheduled to be presented in February 2027. The Finance Ministry and the Indian government will now decide whether to exempt foreign investors from long-term capital gains tax or retain the existing system. Indian Finance Minister Nirmala Sitharaman has also indicated that concerns raised by investors regarding the tax system would be reviewed. However, the government has not yet made any final announcement on abolishing the tax. If approved, the proposal could reduce the cost of foreign investment in India's financial markets and make Indian shares more attractive to global investors.