India Woos Foreign Investors: Why NRIs May Get A Major Relief Under New Rules For LTCG Tax?

The market watchdog SEBI has reportedly proposed to remove the long-term capital gains (LTCG) tax on foreign investors, which could come as a huge relief to encourage foreign investors to invest in the Indian stock market, which has recorded six years of selloffs from FIIs. Now, hopes are pinned on major development from the Centre regarding LTCG in the upcoming Budget.

Remove LTCG Tax For Foreign Investors

Two sources with direct knowledge of the matter told Reuters that the Securities and Exchange Board of India (SEBI) has also proposed tax relief for domestic mutual fund investors, suggesting they be exempt from LTCG if they are ​selling existing holdings to invest in new ones.

This recommendation comes ahead of the Union Budget 2027 in February next year. The final call on LTCG will be taken by the Finance Ministry led by Nirmala Sitharaman.

Hence, this is an speculation and not an official statement.

The Reuters report claims that SEBI's recommendations follow scores of meetings held by the regulator with foreign investors ​over the last two years as selling persisted, putting pressure on the Indian currency.

Accordingly, LTCG tax is expected to be part of the pre-budget discussions ahead.

Investors had been demanding to scrap LTCG for a long time now.

Why Scrapping LTCG Tax Could Be A Major Relief For NRIs?

Global broking Jefferies last week stated that any cut in capital gains taxes could improve the Indian stock market's attractiveness for foreign investors while improving FIIs and FPIs inflows.

Last month, even SBI in its research note stressed the need for removing LTCG to make Indian markets attractive for FIIs.

In SBI's view, the consistent outflow signals the weakening participation of investors and the requirement for policy intervention, which could make the Indian stock market attractive globally.

The SBI Research also added, "The government must seriously look into anchoring hot money flows into the equity segment by extending the holding period to say 2-3 years and abolishing the long-term capital gains tax for equity."

The bank believes the monetary and foreign exchange intervention from RBI to stabilise the financial market is not enough, and structural measures from the government is needed.

It said, "Building substantially low taxation moats for such allocators, post a reasonable period, say 3 years holding, can accentuate incremental flows as India Play remains structurally attractive and marquee/blue chip names locally promise lucrative returns in a competitive market."

What Are Long Term Capital Gains Tax?

LTCG is applied to equities, bonds, mutual funds, debt securities, gold, REITs, and commodities, among other market-related instruments. Also, LTCG is imposed on capital assets on any securities held by an FII that has invested in such securities in accordance with the SEBI Regulations. LTCG is also applied on real estate property.

The Income Tax Department defines LTCG as --- any capital asset held by the taxpayer for a period of more than 36 months immediately preceding the date of its transfer will be treated as a long-term capital asset. Gain arising on the transfer of a long-term capital asset is called a long-term capital gain. In this part you can gain knowledge about various provisions relating to the tax on long-term capital gains.

Latest LTCG Tax Rates in India

Asset type	LTCG tax rate	Exemption / Key rule
Listed shares (delivery-based)	12.5%	First ₹1.25 lakh of eligible annual gains exempt
Equity mutual funds	12.5%	First ₹1.25 lakh of eligible annual gains exempt
REITs / InvITs (eligible listed units)	Generally 12.5%	Depends on the applicable tax provision
Real estate (property)	Generally 12.5%	No indexation under the general rule; special option may apply to eligible older property
Gold and other taxable capital assets	Generally 12.5%	Holding period and asset classification matter
Unlisted shares	Generally 12.5%	Usually treated as long-term after holding for more than 24 months

The short term capital gains tax is 20% for holding market-related assets for less than 12 months.

If LTCG Is Eliminated, Big Relief To These Investors

As per the report, broker IIFL believes that if capital gains tax are scrapped, it could result in foreign investors returns by 2.3 percentage points.

Data of Stock Edge reveals that foreign institutional investors (FIIs) have continued to sell off in the Indian stock market, taking the outflow to a record high of Rs 448,229.19 crore year-to-date. FIIs have been net sellers of the Indian market for six consecutive years now. In 2024 and 2025, their outflows stood above the Rs 3 lakh crore mark each.

Another key recommendation by SEBI is to bring major relief for domestic mutual fund investors. As per the report, returns from diversified domestic equity mutual funds, which are mostly held by retail investors as savings, have been stagnant this year. Data of Morningstar reveals average returns of funds in large-cap stocks dropped by 1.6% this period.

Thereby, Sebi reportedly has recommended that investors should be allowed to switch from one mutual fund scheme to another without paying taxes on sales of the units that are held more than 1 year.

So far, Indian mutual funds hold about Rs 82.6 lakh crore ($870.80 billion) in assets under management. Meanwhile, average monthly SIP contribution ranges from Rs 30,000 to Rs 32,000 crore. As of September 2026, there are 10.06 crore SIP-contributing accounts and 28.62 crore total mutual fund folios. SIPs asset under management is currently at Rs 17.86 lakh crore.