SEBI LTCG Tax Removal Proposal: Will FIIs Return to India?

Foreign investors have sold about $31 billion in Indian equities during 2026, according to Reuters. Now, SEBI has reportedly recommended removing long-term capital gains (LTCG) tax on their Indian equity investments to make the market more attractive.

This is not an approved tax change, nor does it mean LTCG tax will disappear for Indian retail investors. The bigger question is whether tax relief can bring foreign money back when earnings, valuations and the rupee still influence investment decisions.

What Has SEBI Proposed on LTCG Tax?

Under the existing rules, gains from eligible listed Indian shares held for more than 12 months generally attract LTCG tax at 12.5% on aggregate gains exceeding ₹1.25 lakh in a financial year. Eligible shorter-term gains are generally taxed at 20%; cess and surcharge may apply.

SEBI has reportedly recommended removing LTCG tax for foreign portfolio investors (FPIs), often called FIIs, which include overseas investment and pension funds. The recommendation's full wording is not public, and it does not establish an exemption for short-term gains, dividends or transaction charges.

SEBI cannot abolish income tax itself. The proposal needs government action and legal approval. On November 2, Finance Minister Nirmala Sitharaman said investors' concerns would be considered, without promising a tax cut.

Why Does SEBI Want to Remove LTCG Tax for Foreign Investors?

Foreign funds compare India with competing markets based on earnings growth, valuations, currency risk and the returns they keep after taxes. Reuters reported that Indian stocks had lagged several emerging-market peers and that taxation was repeatedly raised during SEBI's discussions with overseas investors.

Removing LTCG tax could improve the returns foreign investors retain when selling Indian shares at a profit. But if an overseas fund believes Indian shares are too expensive relative to future profits, a tax exemption alone may not change its decision.

How Much Could Foreign Investors Save if LTCG Tax Is Removed?

Suppose a foreign fund buys eligible listed Indian shares for ₹1 crore and sells them two years later for ₹1.20 crore, earning ₹20 lakh.

Note: Figures show base tax; applicable surcharges and cess are excluded for simplicity. 

In this example, removing LTCG tax would leave the fund with ₹2,34,375 more profit before other costs. But this changes the investor's after-tax return, not the company's earnings or dividends.

Will Removing LTCG Tax Bring FIIs Back to Indian Markets?

Possibly, but inflows are not automatic. Lower taxes could make India more competitive for international capital. If the change encourages sustained foreign buying, it could support demand and liquidity, particularly in large companies represented in the Nifty 50.

Yet a foreign investor measures results in its home currency. Rupee depreciation can erode gains on Indian shares when converted into dollars. High US bond yields and better opportunities elsewhere also compete for the same money.

Domestic mutual funds and insurers can also absorb foreign selling, so FII withdrawals do not automatically cause an equal fall in the Nifty. See how FIIs and DIIs influence Indian stocks.

The test would be sustained FPI buying over several months, supported by earnings growth, rather than a one-day rally on a tax headline.

Will Indian Retail Investors Benefit From LTCG Tax Removal?

Not directly under the reported foreign-investor proposal. Indian retail investors would still be subject to existing capital gains rules unless the government separately changes the tax treatment applicable to them.

Indian investors might benefit indirectly if foreign inflows lift demand for shares, but higher market prices are not guaranteed. An exemption for overseas funds but not Indian investors raises a fairness question and creates risks of domestic money round-tripping through offshore routes to avoid tax. Finance Minister Sitharaman has said domestic investors' concerns must be considered, while the government must weigh potential capital inflows against forgone tax revenue.

Author's Take: What Should Investors Watch Next?

I see this as a possible improvement in India's appeal to foreign capital, not a reason to assume stocks will rise. A tax cut does not fix weak earnings or expensive valuations.

Watch the government's final decision and eligibility rules, monthly FPI flows for evidence of consistent buying, and corporate earnings versus valuations to judge whether rising share prices are sustainable.

Until a law changes, existing taxes apply. Indian investors should judge holdings by business fundamentals and portfolio needs, not an unapproved proposal.