After FM’s LTCG remarks, Sebi recommends scrapping FPI tax, MF switching relief
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Weeks after Finance Minister Nirmala Sitharaman said the government was open to hearing views on long-term capital gains (LTCG) tax and securities transaction tax (STT), market regulator Sebi has recommended scrapping LTCG tax for foreign portfolio investors (FPIs) and exempting mutual fund switches from the levy, Reuters reported on Monday, quoting two people with direct knowledge of the matter.
Sebi has proposed exempting FPIs from LTCG tax on Indian equities. It has also recommended that switches between mutual fund schemes should not be treated as taxable sales if units have been held for more than a year, the report said.
The proposals form part of Sebi’s pre-Budget representation ahead of Budget 2027-28. They are non-binding, and the government will take the final call.
Speaking at Bloomberg's New Economy Forum in New Delhi on October 13, Sitharaman said investors in India and overseas had raised questions on LTCG and STT. “It’s healthy to have this debate, and I will be keen to hear them,” she said, adding that she would “tread cautiously” on possible Budget changes.
Push to attract foreign investors
The recommendations come amid sustained foreign selling and the underperformance of Indian equities against emerging-market peers. FPIs withdrew around ₹2.95 lakh crore from Indian equities in 2026, including October, according to CDSL data.
The gap is also visible in global benchmarks. On a comparable gross US dollar-return basis, MSCI India fell 14.72% in the year to September 30, while MSCI Emerging Markets gained 23.73%.
Sebi has flagged that transaction costs for investing in Indian equities are among the highest across jurisdictions, the report said, also adding that the proposals are aimed at reducing the upfront tax burden on foreign investors. Investors currently pay LTCG tax of 12.5% on listed equity securities held for more than a year and short-term capital gains tax of 20% on holdings sold within a year, apart from STT. IIFL estimates that scrapping capital gains tax could improve foreign investors’ returns by 2.3 percentage points.
Relief for mutual fund investors
The proposed switching exemption is aimed at encouraging investors to remain in domestic funds without facing LTCG when moving between schemes after holding units for more than a year.
The mutual fund industry’s AUM stood at ₹82.64 lakh crore on September 30. SIP contributions were ₹32,490 crore in September, according to the Association of Mutual Funds in India.