Sebi supports LTCG tax exemption proposal for foreign portfolio investors

The Securities and Exchange Board of India (Sebi) has supported removing long-term capital gains (LTCG) tax for foreign portfolio investors (FPIs), signaling potential regulatory backing for the proposal. The move, if implemented, could enhance India's attractiveness as an investment destination by reducing the tax burden on overseas investors holding Indian securities for extended periods.

Long-term capital gains tax is levied on profits earned from the sale of financial assets held for more than 12 months in most cases. For equity investments, LTCG tax is currently applied at a rate of 20 percent with indexation benefit, or 10 percent without indexation, depending on the asset type and holding period. The tax applies to gains realized when securities such as stocks and mutual funds are sold after meeting the long-term holding criteria.

For FPIs, the current tax structure requires them to pay LTCG tax on profits from selling Indian securities after holding them for the requisite period. Removing this levy would effectively allow foreign investors to retain full profits from long-term holdings, potentially incentivizing longer investment horizons and greater capital inflows into Indian markets.

The proposal comes as Indian policymakers seek to bolster foreign investment in domestic capital markets and strengthen India's position as a regional financial hub. Industry observers suggest that eliminating LTCG taxation for foreign investors could make Indian equities more competitive compared to other emerging market destinations and encourage portfolio diversification by overseas funds.