SEBI Pushes Tax Relief Measures As India Tries To Revive Foreign Investor Interest

Fresh tax proposals ahead of the Budget could reshape investor sentiment in India, with policymakers exploring measures aimed at improving market attractiveness and encouraging long-term participation.

India’s capital markets may be headed for a significant policy shift after the Securities and Exchange Board of India (SEBI) reportedly recommended easing capital gains tax rules for foreign investors and domestic mutual fund participants.

The proposals come at a time when Indian equities have struggled to keep pace with several emerging-market peers, while foreign investors have steadily reduced exposure to local stocks. Policymakers are increasingly looking for ways to improve market competitiveness and attract fresh capital ahead of the Union Budget scheduled for February.

According to people familiar with the recommendations, SEBI has urged the government to remove long-term capital gains (LTCG) tax on foreign portfolio investors. The regulator has also suggested tax relief for domestic mutual fund investors by exempting certain reinvestments from long-term capital gains taxation.

The recommendations are advisory rather than binding, with the final decision resting with the central government.

The proposals have emerged after extensive engagement between market regulators and overseas investors over the past two years. Discussions reportedly focused on concerns about investment costs, taxation and India's relative attractiveness compared with competing destinations for global capital.

Foreign investors have consistently argued that India's tax structure remains one of the key obstacles affecting investment decisions.

The backdrop to these discussions is a period of underperformance in Indian equities. While several emerging-market benchmarks have recorded strong gains, India's stock market has experienced weaker returns, prompting both institutional and retail investors to explore opportunities abroad.

Market participants believe tax reforms could improve post-tax returns and make Indian assets more competitive in global portfolios.

Currently, investors holding securities for more than one year face a long-term capital gains tax of 12.5 per cent. Additional levies include short-term capital gains taxes, securities transaction taxes and taxes on dividend income.

Analysts argue that lowering or removing some of these burdens could improve the risk-reward equation for international investors evaluating India against other emerging markets.

Mutual Fund Proposal Focuses On Retaining Domestic Investors

Alongside measures aimed at overseas investors, SEBI has also proposed changes intended to support domestic participation in mutual funds.

The recommendation would allow investors to switch between mutual fund schemes without triggering long-term capital gains tax liability, provided the original investment has been held for more than a year and the proceeds remain invested within the mutual fund ecosystem.

The rationale is to encourage long-term savings and prevent tax considerations from discouraging investors from reallocating capital between schemes.

The proposal arrives at a time when returns from several domestic equity mutual fund categories have been relatively subdued. Policymakers appear keen to ensure retail investors remain engaged with domestic markets rather than increasing allocations to foreign assets.

Industry observers believe these measures could provide a timely boost to investor confidence.

Supporters of the proposals argue that India remains one of the few major markets where foreign investors are subject to capital gains taxation on investments, creating a disadvantage relative to competing destinations.

Others view the suggested reforms as part of a broader effort to address slowing capital inflows and improve market liquidity.

The debate also reflects growing competition for global investment capital. As international investors become increasingly selective, governments are under pressure to ensure their tax regimes do not discourage participation.

Whether the recommendations are ultimately adopted will become clearer during preparations for the next Union Budget.