SEBI Wants LTCG Tax Scrapped for Foreign Investors: What It Proposed, Why Now and What It Means for You, Explained
SEBI has recommended that the government remove long-term capital gains tax for foreign investors and stop taxing switches between mutual fund schemes held for over a year, Reuters reported on 2 November 2026. The proposals are not binding and the call will be made in the February Budget. Here is what was proposed, why foreign money matters, what brokers say and what it could mean for Indian investors.
India's markets regulator has put one of the most debated taxes in the country on the table. The Securities and Exchange Board of India (SEBI) has recommended that the government remove long-term capital gains (LTCG) tax for foreign investors, Reuters reported on Monday, 2 November 2026, citing two people with direct knowledge of the matter.
The news landed on a strong day for Indian shares. The Sensex closed up 1,233 points and the Nifty ended above 23,400, though that rally was led mainly by Reliance Industries after its record September quarter results. Here is what SEBI proposed, why it matters and what to keep in mind.
The 60-second version
- The proposal: SEBI has recommended scrapping LTCG tax for foreign investors, according to Reuters.
- Mutual funds too: It also proposed that switching between mutual fund schemes should not count as a taxable sale if units are held for over a year.
- Not final: These are pre-budget recommendations. They are not binding, and the decision rests with the government.
- When: Any change would most likely come in the Union Budget in February 2027.
- Why now: Foreign investors have sold a record $31 billion of Indian shares this year, Reuters reported.
- No comment yet: SEBI and the finance ministry did not respond to Reuters' emails.
What SEBI has proposed
According to the Reuters report, carried by BusinessLine, The Economic Times and Moneycontrol:
| Proposal | What it would change |
|---|---|
| No LTCG for foreign investors | Foreign investors would no longer pay tax on long-term gains from Indian equity |
| Tax-free scheme switches | Moving money from one mutual fund scheme to another would not be treated as a sale, if units are held for over a year |
The recommendations are part of SEBI's pre-budget representations, which are not made public. Reuters said the full details of the proposals could not be learned.
How capital gains are taxed today
| Holding period | Tax on listed equity gains |
|---|---|
| More than 1 year (LTCG) | 12.5% |
| 1 year or less (STCG) | 20% |
On top of these rates:
- Securities transaction tax (STT) is charged on trades. STT on equity derivatives was raised from 1 April 2026, JM Financial noted.
- Foreign portfolio investors (FPIs) also pay surcharge and cess, so their effective rate is above the headline rate, Business Today reported. Some can claim treaty relief depending on where they are based.
- Dividends face withholding tax, Reuters noted.
One quirk hurts foreign investors in particular. The tax is worked out on the rupee gain, not the dollar gain. When the rupee weakens, a foreign investor can owe tax on a gain that is smaller, or even negative, in dollars, JM Financial pointed out.
Why foreign money matters right now
India has been out of favour with global funds:
- Record selling: FPIs have sold a record $31 billion of Indian stocks this year, according to Reuters.
- Two-year exodus: Business Today, citing market data, put FPI outflows at $64 billion over the past two years.
- Lagging returns: The Nifty 50 is down 4.8% over two years, while the MSCI Emerging Markets index is up about 40%, Reuters reported.
- Weak funds: Large-cap mutual funds have returned minus 1.6% on average over that period, according to Morningstar data cited by Reuters.
The government has already signalled it is listening. On 13 October 2026, Finance Minister Nirmala Sitharaman said she would "keenly" hear views on LTCG and STT, calling the debate "healthy", The Hindu reported. She did not say whether the issue would be taken up in the Budget. The market rose about 1% soon after her remarks.
What brokers and fund managers say
- JM Financial estimated that removing LTCG would add about 2.2 percentage points to a foreign investor's average annual dollar return. But it called the tax "a small lever beside valuation", and said relief could add $3 billion to $5 billion to inflows in FY28 in its bull case. It said the move may matter most as a signal to global allocators.
- IIFL estimated scrapping the tax could lift foreign investors' returns by about 2.3 percentage points, Reuters reported.
- Jefferies said any cut could improve India's attractiveness to foreign investors, according to Reuters.
- Samir Arora of Helios Capital told Reuters India is one of very few countries that tax foreigners on capital gains.
- Gary Tan of Allspring Global Investments called it a "clear positive" for foreign investors, Reuters reported.
- Raamdeo Agrawal of Motilal Oswal told Business Today it would likely be seen as positive, but that investors would have to wait for the final announcement in the Budget.
JM Financial also noted India is an outlier in Asia. Singapore and Hong Kong do not tax capital gains, Taiwan suspended its tax on listed securities in 2016, and Korea exempts gains on listed shares for most investors.
The cost to the government
Equity LTCG collections stood at about Rs 1.29 lakh crore in FY25, according to data cited by Business Today. That is only the total from all investors, not foreign investors alone, but it shows why any relief has to be weighed against the government's fiscal deficit target of 4.3% of GDP.
What it means for you
A quick note: this is an explainer, not investment or financial advice.
- If you are a resident investor: Nothing changes for now. The proposal as reported covers foreign investors, and you continue to pay LTCG at 12.5% above the annual exemption. Our guide to mutual fund taxation in India explains the current rules.
- If you switch mutual fund schemes: The proposed switch relief could matter to you directly if it is accepted, since a switch is treated as a redemption today. Until the Budget, the current rules apply.
- For the market: More foreign buying could support prices, but brokers stress that valuations and earnings matter more than tax alone.
What to watch next
- The government's response. Whether the finance ministry comments on SEBI's recommendations before the Budget.
- Pre-budget consultations. Whether other bodies, such as fund houses and industry groups, back the proposal.
- FPI flows. Whether foreign selling slows on the expectation of relief.
- Budget 2027 in February. The final word on LTCG, STT and the mutual fund switch rules.
SEBI has put a clear marker down: India's tax on foreign investors is now part of the Budget conversation. Whether it turns into law, and whether it brings foreign money back, will be decided in February.
This explainer is based on a Reuters report of 2 November 2026 as carried by BusinessLine, The Economic Times and Moneycontrol, along with reporting by Business Today, The Hindu and Moneycontrol's market close report. SEBI's recommendations are not public and are not binding. Figures reflect the situation at the time of writing. This is not investment or tax advice.
Frequently asked questions
›What has SEBI proposed on LTCG?
According to a Reuters report on 2 November 2026, citing two people with direct knowledge, SEBI has recommended that the government remove long-term capital gains tax on investments by foreign investors in India. The proposal is part of SEBI's pre-budget representations, which are not public.
›Has the LTCG tax for foreign investors actually been removed?
No. SEBI's recommendations are not binding. The final decision rests with the government, and any change would most likely come in the Union Budget due in February 2027. SEBI and the finance ministry did not respond to Reuters' requests for comment.
›What did SEBI propose for mutual fund investors?
Reuters reported that SEBI also proposed that switching from one mutual fund scheme to another should not be treated as a taxable sale if the units have been held for more than a year. Today, a switch is generally treated as a redemption, which can trigger capital gains tax.
›What is the current LTCG tax rate in India?
Long-term capital gains on listed equity held for more than a year are taxed at 12.5 percent, and short-term gains at 20 percent. Foreign portfolio investors also pay surcharge and cess on top, and securities transaction tax is charged separately on trades, as Business Today reported.
›Why does it matter for the stock market?
Foreign investors have sold a record $31 billion of Indian shares this year, according to Reuters. Brokers estimate that removing the tax could add about 2.2 to 2.3 percentage points to a foreign investor's annual returns, though JM Financial called it a small lever compared with valuations.