SEBI Proposes Scrapping Capital Gains Tax for Foreign Investors

India’s markets regulator, the Securities and Exchange Board of India (SEBI), has recommended that the government remove long-term capital gains tax for foreign investors, and give domestic mutual fund investors tax relief when they switch from one fund scheme to another. These are proposals only, not a change in the law. The government will make the final decision, probably in the annual budget in February.

What happened

Reuters reported on November 2, 2026 that SEBI made the recommendations in its pre-budget proposals to the government, citing two sources with direct knowledge of the matter. The sources were not named, because the proposals are private. Reuters reported that SEBI and the finance ministry did not respond to emailed requests for comment.

The proposal has two parts. First, foreign investors would no longer pay long-term capital gains tax on listed equities. At present, investors pay 12.5 percent long-term capital gains tax on gains from securities held for more than a year, above an annual exemption of 1.25 lakh rupees on eligible listed equities and equity-oriented mutual funds. Investors who sell within a year pay 20 percent short-term capital gains tax, plus securities transaction tax on trades and withholding tax on dividends.

Second, domestic mutual fund investors would get relief when they move money between schemes. SEBI has proposed that switching from one mutual fund scheme to another should not be treated as a taxable sale, provided the units have been held for more than a year. In simple terms, moving your money from one fund to another would not trigger a tax bill on its own, as long as you stay invested and meet the holding period.

Reuters reported that brokerage firm IIFL estimates scrapping capital gains tax could raise foreign investors’ returns by 2.3 percentage points. Jefferies, another brokerage firm, said a cut in capital gains tax could make Indian equities more attractive to overseas investors.

Why it matters for beginners

Capital gains tax is the tax you pay on the profit you make when you sell an investment for more than you paid for it. A long-term gain is a profit on an investment held for a longer period, in this case more than a year. A short-term gain is a profit on an investment sold sooner.

Tax matters because it reduces what you keep. If you make a profit of 100 rupees and pay 12.5 rupees in tax, you keep 87.50 rupees before any other charges. Removing that tax would leave foreign investors with more of their profit, which could make Indian shares more attractive compared with shares in other countries.

The background helps explain why SEBI is pushing this now. Reuters reported that foreign investors have withdrawn about 31 billion dollars from Indian equities so far in 2026. Indian shares have also lagged other emerging markets: the Nifty 50 index has fallen 4.8 percent over the past two years, while the MSCI Emerging Markets Index has risen 40 percent over the same period, according to the Reuters report.

For domestic investors, the mutual fund part of the proposal is about removing a barrier to switching. At present, selling one fund to buy another can trigger a tax bill, even though the money stays invested. If switching becomes tax neutral after a year, investors could change funds without paying tax on the move itself. Indian mutual funds hold 82.6 trillion rupees in assets, with about 30 billion rupees flowing in each month through regular monthly investment plans, according to the Reuters report.

For context on how Indian markets have performed recently, see the recent post on Indian Oil posting a record quarterly profit as refining margins recovered.

What to watch next

• Whether the government accepts SEBI’s proposals in the annual budget in February.
• Any conditions the government attaches, such as who qualifies and which investments are covered.
• Whether foreign investors return to Indian equities if the tax is removed.
• How domestic mutual fund switching rules change, and whether the one year holding condition stays.
• The finance minister’s earlier signal that the government is open to considering suggestions on capital gains tax, without committing to a change.

FAQ

Has the tax already been removed?

No. SEBI has only recommended the change. The proposals are not binding, and the government has the final say. Until the government announces a change, the existing rules stay in force: 12.5 percent long-term capital gains tax above the annual exemption, and 20 percent short-term capital gains tax.

What is long-term capital gains tax in simple terms?

It is a tax on profit from selling an investment you have held for a long time. In India, for listed shares, long-term means more than a year. Short-term means a year or less. The long-term rate is lower than the short-term rate, which rewards investors who hold for longer.

Would this help ordinary Indian investors directly?

The foreign investor part would not change the tax paid by domestic investors directly. The mutual fund switching part could help domestic investors, because switching funds after holding for more than a year would no longer count as a taxable sale under the proposal. The details would depend on what the government finally approves.

Why would a tax cut attract foreign investors?

Foreign investors compare returns across countries after tax, not before tax. If India removes a 12.5 percent tax on long-term gains, the after tax return on Indian shares rises, even if share prices do not change. That can make India more competitive with other markets that charge less tax or no tax on such gains.

What could stop the proposal?

The government must weigh lost tax revenue against the benefit of attracting investment. It may accept the proposal in full, accept only part of it, change the conditions, or reject it. The budget in February is the next clear moment when a decision could appear.