Equity LTCG tax cut could revive FPI flows, support rupee

The possible decrease in long- and short-term capital gains tax rates will motivate foreign portfolio financiers (FPIs) to go back to Indian equities, which they have actually deserted in the last couple of months. The relocation will likewise support the rupee, which has actually dealt with pressure from continual capital outflows, stated Jefferies, the worldwide financial investment banking and capital markets company.

The federal government will have to stabilize the prospective income loss versus financial restrictions, and its more comprehensive goal of assembling tax throughout possession classes.

Unofficial news has actually been drifting in the market on a possible across-the-board decrease in LTCG and short-term capital gains (STCG) tax rates, a targeted LTCG cut for FPIs, or enabling foreign financiers to determine gains in dollar terms to offer some relief versus currency motions.

India eliminated LTCG tax on noted equities in 2004 and presented 10 percent STCG tax and securities deal tax (STT). In 2018, LTCG tax was reestablished at 10 per cent along with STT.

Unlike numerous emerging markets that excuse foreign financiers from equity LTCG tax, India taxes FPIs at 12.5 percent on long-lasting gains and 20 percent on short-term gains given that 2024. Tax benefits formerly offered through particular jurisdictions under double-taxation avoidance contracts (DTAA) have actually likewise narrowed given that April 2019.

Equity LTCG taxation stood at 1.3 lakh crore in FY25, when domestic markets were near their peaks. STT collections are annualising at about 85,000 crore in FY27.

Income loss

Together, equity LTCG tax and STT represented around 8 percent of direct taxation and 5 percent of gross tax earnings in FY25. The federal government may, for that reason, require to weigh any earnings loss versus the possible advantages of greater foreign financial investment.

An analysis of 70 big emerging market funds with properties under management of $380 billion revealed India underweight by 0.3 portion points, versus a 10-year average overweight of 2.2 portion points.

Equity-market-related exits by FPIs, foreign promoters and foreign personal equity financiers amounted to $110 billion considering that April 2025. Following current tax relief for foreign financiers in federal government securities, financial obligation FPI inflows reached $9 billion throughout June and July 2026.

Financials have actually seen the biggest net FPI outflows given that October 2024, at $16 billion, followed by infotech and customer staples at $10 billion each. Banks, energy, energies and realty might benefit if foreign circulations recuperate.

Large-caps have actually underperformed by 5 portion points in 2026 and trade at a 23 percent discount rate to their 10-year typical assessment, possibly enhancing their relative appeal as earnings-growth distinctions narrow.

Released on October 29, 2026