The Centre has begun reassessing India’s capital market tax regime, seeking views from investors, market participants and tax experts on long-term capital gains, LTCG tax and securities transaction tax (STT) as foreign portfolio investors continue to pull money out of Indian equities. The government is examining concerns over the existing levies ahead of Budget 2027, with the possibility of changes emerging as part of the review. 

The consultations follow Finance Minister Nirmala Sitharaman’s remarks on October 13, when she acknowledged the debate surrounding the taxes and said the issue had also come up in conversations with investors in India and overseas. With preparations for the next Union Budget underway, the government is weighing stakeholder concerns alongside the revenue implications of any changes. 

The issue has gained urgency as foreign investors have withdrawn substantial sums from Indian equities. Market participants have argued that the combination of LTCG tax and STT adds to the cost of investing in Indian markets, potentially making them less attractive than competing destinations. Suggestions include easing the capital gains tax burden or allowing STT to be adjusted against capital gains tax. These remain proposals under discussion, rather than confirmed policy changes.

However, the tax regime is only one part of the debate. Global interest rates, currency movements, equity valuations and corporate earnings also influence foreign investment decisions. The government’s challenge is to assess whether changes to capital market taxation could improve India’s appeal to overseas investors without sacrificing significant tax revenue at a time when public spending requirements remain substantial.

Foreign Investors Withdraw ₹3.08 Lakh Cr In 2026

The scale of the foreign investor pullout provides the immediate context for the government’s review. Foreign portfolio investors (FPIs) withdrew ₹48,056 crore from Indian equities in October, taking cumulative equity outflows in 2026 to ₹3.08 lakh crore. This compares with net withdrawals of ₹1.66 lakh crore during the whole of 2025. 

The selling has not been uninterrupted. FPIs invested ₹20,200 crore in Indian equities in July and ₹29,631 crore in August before withdrawing ₹35,861 crore in September. The October outflows have since pushed the cumulative figure for the year substantially higher, although selling moderated during the week ended October 23, when foreign investors turned net buyers on two trading days. 

The figures also need to be read alongside activity in the primary market. NSDL data showed that FPIs had withdrawn ₹3.64 lakh crore from the secondary market through October 12, while investing a net ₹56,485 crore in primary-market offerings over the same period. The divergence suggests that foreign investors were reducing exposure to existing listed holdings while continuing to participate in new share issuances.

That distinction matters when assessing what the outflows say about foreign investor sentiment towards India. Selling in the secondary market does not necessarily mean overseas investors have abandoned Indian equities altogether. The pattern may also reflect portfolio reallocation, valuations and the relative attractiveness of other markets.

Nevertheless, the scale of the withdrawals has intensified the debate over whether India’s tax framework is adding to the difficulties faced by its equity market. Establishing how much of the selling can reasonably be attributed to taxation, as opposed to broader global and domestic factors, will be central to understanding the government’s review.

From Buying To Selling, How The FPI Trend Has Changed

Foreign portfolio investor (FPI) activity in 2026 has been marked by sharp reversals rather than a continuous withdrawal. After selling Indian equities in June, overseas investors returned to the market in July and August, investing ₹20,200 crore and ₹29,631 crore, respectively. The trend reversed in September, when they withdrew ₹35,861 crore, followed by another heavy bout of selling in October.

The shift is particularly striking when viewed against the first half of the year. FPIs withdrew ₹49,340 crore in June, before returning as net buyers over the following two months. By October 23, their net equity outflows for the month had reached ₹48,056 crore, according to data compiled from depository figures.

This brought cumulative outflows for 2026 to ₹3.08 lakh crore at that reporting cut-off, already well above the ₹1.66 lakh crore withdrawn during the whole of 2025.

There were, however, signs of a short-term pause in the selling. FPIs bought equities on two trading days in the week ended October 23, while their net purchases over the four trading sessions from October 17 to 23 totalled ₹4,044 crore. That brief recovery does not, by itself, establish that the wider trend has reversed.

The pattern suggests that foreign investment flows remain sensitive to changing market conditions.

Whether the October withdrawals mark a sustained retreat or another phase in a volatile cycle will depend on what happens next to global interest rates, oil prices, the rupee and expectations for Indian corporate earnings.

Why Are Foreign Investors Exiting Indian Equities?

The foreign investor sell-off reflects a combination of global economic pressures and concerns about India’s investment outlook, rather than any single factor. Elevated US bond yields have made American assets more attractive, while a stronger dollar and a weakening rupee have added to the currency-related risks faced by overseas investors.

Rising crude oil prices have further complicated the outlook for an economy that depends heavily on imported energy.

Oil has become a particular concern. Brent crude traded near $115 a barrel on October 26, following a roughly 13% rise over three weeks amid fears of supply disruptions linked to geopolitical tensions in the Middle East. Higher oil prices can increase India’s import bill, put pressure on inflation and corporate margins, and complicate the government’s fiscal calculations. The rupee also weakened to 95.1850 against the US dollar on October 26, adding to concerns about the cost of foreign investment.

Valuations and earnings expectations are another part of the equation. Foreign investors must weigh the returns available in India against those in competing markets, including North Asian economies benefiting from demand for semiconductor and artificial intelligence-related stocks. Concerns that higher input costs could constrain future corporate earnings have also influenced sentiment.

Taxation therefore enters a wider debate about India’s competitiveness. While some market participants favour relief on LTCG and STT, the available evidence does not establish that these taxes alone explain the outflows. The key question for policymakers is whether tax changes could improve India’s appeal while addressing the broader factors influencing global investment decisions.

Indian Markets Under Pressure, How Does India Compare?

Indian equities have faced renewed selling pressure amid persistent foreign investor outflows, elevated crude oil prices and geopolitical uncertainty. On October 27, the Nifty 50 slipped 0.06% to 22,738.55, while the Sensex fell 0.16% to 73,497.28. The headline indices were relatively steady, but the broader market showed a more mixed picture, with small-cap stocks gaining 1.7% and mid-caps rising 0.5%.
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The weakness has also extended beyond a single trading session. During the week preceding October 27, the Nifty 50 declined 2.36% and the Sensex fell approximately 2.15%, reversing gains recorded over the previous two weeks. Elevated oil prices and uncertainty over the global economic outlook added to the pressure on domestic equities.

The longer-term comparison is equally important. A recent report puts the decline in India’s equity market capitalisation since the September 2024 peak at $924 billion.

Which Sectors Are Losing Foreign Money, And Which Are Attracting It?

The foreign investor sell-off has affected most major sectors, but the extent of selling has varied considerably.

Financial services recorded the largest FPI outflow in the first half of October, at ₹8,634 crore, followed by fast-moving consumer goods (FMCG) at ₹8,172 crore and automobiles at ₹6,533 crore. Healthcare and telecommunications also saw substantial withdrawals, of ₹5,497 crore and ₹3,928 crore, respectively.

The selling extended to capital goods, metals and oil and gas stocks, which recorded outflows of ₹3,886 crore, ₹3,693 crore and approximately ₹3,689 crore, respectively, during the same fortnight. The breadth of the withdrawals suggests that foreign investors were reducing exposure across several parts of the market, rather than targeting a single industry.

Information technology stocks, however, bucked the trend. FPIs bought approximately ₹2,599 crore worth of IT shares in the first half of October, after selling around ₹1,000 crore in September. Market participants attributed the buying partly to more attractive valuations, with some Indian IT stocks trading closer to or below their long-term averages.

The contrast is revealing. While concerns about earnings growth, funding costs and valuations weighed on financial services, consumption and automobile stocks, parts of the IT sector attracted selective buying. Yet this does not necessarily signal a broad return of foreign capital to Indian equities. The sectoral data points instead to investors reassessing individual opportunities even as overall portfolio outflows continue.

For the government’s tax review, this distinction matters. If foreign investors are shifting money between sectors and markets in response to valuations and earnings expectations, tax relief alone may not reverse the trend. If transaction costs and tax treatment are also influencing investment decisions, however, changes to the regime could form part of a broader effort to improve India’s competitiveness.

What LTCG And STT Mean For Investors

At the centre of the government’s review is a question about how India taxes equity investment. Long-term capital gains (LTCG) tax applies to profits earned from selling qualifying investments held for the prescribed period, while securities transaction tax (STT) is charged on specified securities transactions. For listed equity shares qualifying under Section 112A, LTCG is currently taxed at 12.5% on annual gains exceeding ₹1.25 lakh, subject to the applicable conditions.

For equity delivery transactions, STT is levied separately from capital gains tax. Reports note that market participants have questioned the simultaneous application of the two levies, arguing that the combined burden makes Indian markets less competitive for foreign investors also focusing on stamp duty, which applies separately to securities transactions.

The distinction matters because LTCG is calculated on qualifying profits, whereas STT is linked to the transaction itself. An investor can therefore incur STT on a transaction even when the eventual investment outcome does not produce a capital gain. Industry representatives argue that this structure deserves reconsideration, particularly for foreign portfolio investors comparing India with other markets.

However, the taxes do not affect all investors in identical ways, and their impact depends on trading activity, holding periods, investment returns and applicable tax rules.

The policy debate is therefore not simply about lowering a tax rate; it is about how the overall cost and certainty of investing in Indian equities compare with alternatives elsewhere.

The Revenue Question Behind Any Tax Relief

The government’s review also has a significant fiscal dimension. India’s LTCG tax collections reached ₹1.29 lakh crore in FY25, nearly double the ₹72,249 crore collected in FY24. Meanwhile, STT collections stood at ₹57,522 crore in FY26, underlining the importance of securities transactions as a source of government revenue.

More recent figures indicate that STT collections continued to rise. Between April 1 and October 14, 2026, collections reached ₹46,840 crore, up 51.6% from the corresponding period a year earlier. The increase was partly supported by higher STT rates on equity derivatives introduced in April 2026, making it important to distinguish the impact of tax-rate changes from changes in trading activity.

Reducing LTCG or restructuring STT could therefore affect government receipts, although the precise impact would depend on the design of any change and how investors respond.

Supporters of reform argue that a more competitive tax structure could encourage investment and improve market participation. The countervailing concern is that lower rates could reduce revenue without necessarily reversing foreign investor outflows driven by global interest rates, currency movements or valuations.

The government must weigh these competing considerations before deciding whether the potential benefits of tax relief justify the fiscal cost. The available collection figures establish the revenue involved, but they do not, on their own, tell us how much additional investment a tax reduction might attract.

How Competitive Is India’s Tax Regime Compared With Global Markets?

India’s taxation of equity investments has become an important part of the debate over its ability to attract foreign capital. While long-term gains on qualifying listed equities are taxed at 12.5%, with applicable surcharge and cess, investors also face securities transaction tax.

In contrast, financial centres such as Singapore and Hong Kong generally do not impose capital gains tax on investments held as capital assets, although profits arising from trading activities may be taxable.

The comparison with other major economies is more complicated. The United States and the United Kingdom have capital gains tax regimes, but their treatment of non-resident investors differs from that of domestic taxpayers. Japan, South Korea and Taiwan also have distinct rules governing securities gains and transactions. Consequently, headline tax rates alone cannot establish which market offers foreign investors the most favourable treatment.

Tax experts argue that India’s combination of LTCG and STT creates an additional burden when overseas investors compare potential post-tax returns. Sudhir Kapadia, senior adviser at KPMG, has suggested removing capital gains tax for foreign portfolio investors while adjusting STT to limit the revenue impact.

EY India’s Sameer Gupta has also called for a broader review of the tax burden and greater certainty over the application of international tax treaties.

However, tax competitiveness is only one consideration. Foreign investors also assess corporate earnings, currency movements, valuations and the availability of investment opportunities in other countries. A more favourable tax structure could improve post-tax returns, but it would not necessarily overcome concerns arising from weaker earnings expectations or more attractive returns elsewhere.

What Changes Are Being Considered, And What Happens Next?

The government’s reassessment has brought several proposals into focus, ranging from reducing long-term capital gains tax to restructuring how securities transactions are taxed.

Suggestions include eliminating LTCG for foreign portfolio investors while adjusting STT, introducing a zero LTCG rate for investments held over longer periods, and allowing STT payments to be set off against capital gains tax. These proposals remain under consideration, with no formal decision announced.

Separately, reports suggest that the Centre had held discussions with industry representatives, SEBI, the Central Board of Direct Taxes and banks. The report, citing sources familiar with the discussions, said the government was also examining whether foreign investors’ taxable gains could be calculated in dollar terms rather than rupees. Such a change could address situations where currency depreciation reduces an overseas investor’s actual dollar-denominated return despite gains being recorded in rupees.

Any reform would have to balance the objective of attracting foreign investment against the government’s revenue requirements. Finance Minister Nirmala Sitharaman has acknowledged the debate but has not committed to reducing or abolishing either levy. Budget 2027 provides a possible opportunity for changes, although reports suggesting an earlier decision remain unconfirmed.

The Last Bit,

Ultimately, the debate extends beyond whether India’s capital gains tax is too high.

Foreign investors are responding to global interest rates, currency volatility, corporate earnings and opportunities in competing markets, alongside domestic taxation.

Revisiting LTCG and STT could address one element of India’s investment competitiveness, but whether it would be sufficient to reverse the foreign investor exodus remains an open question.