India’s securities market regulator has reportedly recommended removing long-term capital gains tax on equity investments made by foreign investors. The proposal, reported on November 2, 2026, comes ahead of Union Budget 2027 and could become an important development in India’s efforts to attract overseas capital.

According to Reuters, the Securities and Exchange Board of India submitted the recommendation to the Ministry of Finance as part of its pre-budget representations. The information came from two people familiar with the discussions, rather than a publicly released government decision.

The proposal seeks to eliminate the existing 12.5% long term capital gains tax applicable to qualifying equity investments by foreign portfolio investors. If accepted, it could improve the post tax returns available to overseas institutions investing in Indian shares.

However, the recommendation is not binding on the government. The Finance Ministry retains authority over tax policy, and no final decision to abolish the levy has been announced.

Under the existing framework, gains from listed equity shares held for more than twelve months generally attract a 12.5% long-term capital gains tax. Short-term gains on qualifying listed equities are generally taxed at 20%, subject to applicable provisions.

Foreign investors also face securities transaction tax and other applicable charges. Dividend income can attract withholding tax, making the overall tax burden an important consideration when comparing India with other investment destinations.

The proposal arrives during a challenging period for foreign investment in Indian equities. Overseas investors have sold approximately $31 billion worth of Indian stocks during 2026, according to figures cited in the Reuters report.

Persistent foreign selling has created pressure on Indian equity valuations and the rupee. It has also highlighted concerns about whether India’s investment returns remain sufficiently attractive compared with competing emerging markets.

Indian equities have underperformed several emerging-market peers over the preceding two years. This relative weakness has intensified discussions about taxation, transaction costs and the factors influencing international capital allocation.

SEBI’s recommendation follows extensive engagement with foreign institutional investors. During meetings over the past two years, taxation reportedly emerged as a recurring concern among global investment managers.

The regulator’s objective is to reduce the tax burden faced by overseas investors and improve India’s competitiveness. Lower taxation could increase the portion of investment gains retained by foreign funds.

For example, a qualifying long-term capital gain of ₹100 would ordinarily attract ₹12.50 in tax at a 12.5% rate, before considering exemptions, surcharges or other adjustments. Removing that levy would change the economics of such investments.

This difference can become significant for large institutional portfolios managing billions of dollars. Even relatively small changes in effective returns may influence investment decisions across competing international markets.

However, tax relief alone cannot guarantee a sustained return of foreign capital. Global interest rates, corporate earnings, currency movements, valuations and geopolitical developments also influence portfolio allocation.

The proposal raises an important question about tax treatment between foreign and domestic investors. If overseas institutions receive an exemption while Indian retail investors continue paying LTCG tax, the difference could generate debate about fairness.

SEBI has reportedly included a separate recommendation benefiting domestic mutual fund investors. It has suggested tax relief when investors move holdings maintained for more than one year from one mutual fund scheme into another.

Under the existing framework, switching between mutual fund schemes can create a taxable capital gains event. The proposed relief would reduce the immediate tax consequences of eligible portfolio changes.

This measure could make it easier for long-term mutual fund investors to adjust their portfolios without triggering capital gains tax solely because of a qualifying scheme switch. The precise conditions would depend on any legislation eventually introduced.

India’s mutual fund industry has grown into a major source of domestic market participation, with assets under management reaching approximately ₹82.6 lakh crore. Regular investment contributions have helped strengthen the domestic investor base.

The government must also consider the potential revenue implications of changing capital gains taxation. Any exemption would require balancing investment competitiveness against fiscal priorities and the treatment of different investor categories.

Another uncertainty concerns the final scope of any possible exemption. The government could accept, modify or reject the recommendation, and details concerning eligibility, effective dates and applicable securities remain unresolved.

For investors, the development represents a potentially important policy discussion rather than an immediate tax change. The next meaningful milestone will be an official Finance Ministry announcement or the presentation of Union Budget 2027.