SEBI has recommended removing LTCG tax for foreign investors and proposed tax relief on mutual fund switches to boost India's equity markets amid a record sell-off by overseas investors seeking better returns compared to the domestic benchmark.
SEBI Proposes Tax Relief to Boost Indian Equity Markets
The Securities and Exchange Board of India (SEBI) has recommended removing long-term capital gains (LTCG) tax on foreign investors and proposed tax relief for domestic mutual fund investors, as the regulator seeks to improve the attractiveness of Indian equity markets and encourage investment, according to a Reuters report. The recommendations have been made as part of SEBI's pre-budget representations to the government ahead of the Union Budget in February. The proposals are not binding, and the final decision rests with the government, the report said, citing two sources with direct knowledge of the matter.
Tax Relief Proposals for Investors
SEBI has suggested that foreign investors be exempted from the 12.5 per cent LTCG tax currently applicable to equity investments held for more than one year. Investors holding equities for less than 12 months are subject to a 20 per cent short-term capital gains tax, in addition to securities transaction tax on trades and withholding taxes on dividends. "The proposals are aimed at reducing the upfront tax burden on foreign investors," one of the sources told Reuters.
The recommendations come amid sustained foreign investor selling in Indian equities. Foreign investors have sold a record USD 31 billion worth of Indian stocks this year, while overseas investments by retail investors have increased as domestic market returns remained subdued. SEBI's proposals follow several meetings held by the regulator with foreign investors over the past two years. According to the sources cited by Reuters, one of the consistent concerns raised by investors was India's taxation framework.
Incentivizing Domestic Mutual Fund Investments
The regulator has also proposed relief for domestic mutual fund investors by suggesting that switching from one mutual fund scheme to another should not be treated as a taxable sale if the units have been held for more than a year. The proposal is aimed at encouraging investors to remain invested in domestic mutual funds rather than face a tax liability when shifting between schemes, the report said.
India's benchmark Nifty 50 has declined 4.8 per cent over the past two years, while the MSCI emerging markets index has gained 40 per cent during the same period. Average returns from large-cap domestic equity mutual funds have also fallen 1.6 per cent, according to Morningstar data cited in the report. The recommendations could improve investor returns if accepted. Brokerage firm IIFL estimates that scrapping capital gains tax could increase foreign investors' returns by 2.3 percentage points, Reuters reported.
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