New Delhi: The Securities and Exchange Board of India (SEBI) has recommended scrapping the 12.5% long-term capital gains (LTCG) tax on equity investments by foreign investors and proposed tax exemptions for domestic mutual fund investors switching between schemes, ahead of the Union Budget 2027.
According to a Reuters report published on November 2, the market regulator has submitted the recommendations to the government as part of its pre-Budget representations. The proposals are non-binding and will require approval from the Finance Ministry.
Under the existing tax framework, foreign investors are required to pay 12.5% LTCG tax on eligible equity investments held for more than 12 months. Short-term capital gains on investments held for 12 months or less attract a 20% tax.
SEBI’s proposal to remove the LTCG levy is aimed at reducing the tax burden on overseas investors and making Indian equity markets more attractive to foreign capital.
The recommendation comes amid sustained selling by foreign portfolio investors (FPIs), who have reportedly offloaded a record USD 31 billion worth of Indian equities in 2026. The regulator has also highlighted concerns over India’s relatively high transaction costs and taxation-related challenges raised by foreign investors during consultations over the past two years.
Separately, SEBI has proposed exempting domestic mutual fund investors from LTCG tax when switching between schemes, provided they have held their existing investments for more than a year.
Currently, switching from one mutual fund scheme to another is treated as a redemption followed by a fresh investment, making any resulting capital gains taxable. The proposed exemption could allow investors to realign their portfolios without incurring an immediate LTCG tax liability.
The recommendation assumes significance as India’s mutual fund industry manages assets worth approximately Rs 82.6 lakh crore, with monthly investment schemes attracting an average inflow of Rs 3,000 crore.
Both proposals are awaiting government consideration and may be examined during the preparation of the Union Budget 2027, scheduled to be presented in February. Existing tax provisions will remain applicable until any changes are formally approved and notified.
