SEBI recommends removing 12.5% LTCG tax for foreign investors in pre-budget proposal

2 Nov 2026 , 12:58 PM

SEBI recommended that the government remove the 12.5% long-term capital-gains tax on foreign investors, but the nonbinding pre-budget proposal made months before the annual Budget in February still awaits a final government decision. The regulator also proposed relief for domestic mutual-fund investors who switch from existing holdings into new schemes.

Key Takeaways

• SEBI proposed that switching between domestic mutual-fund schemes should not be treated as a taxable sale when the units have been held for more than a year.
• Foreign investors currently pay 20% short-term capital-gains tax, securities transaction taxes and withholding taxes on dividends in addition to long-term capital-gains tax.
• The recommendations followed meetings SEBI held with foreign investors over the last two years, with tax changes a consistent investor concern.
• Foreign investors sold $31 billion in Indian stocks this year as the Nifty 50 declined 4.8% over two years.

SEBI recommends removing 12.5% foreign-investor LTCG tax

SEBI recommended that the government remove the long-term capital-gains tax imposed on foreign investors. The proposal covers the 12.5% levy on securities held for more than a year.

SEBI made the recommendations months before the annual Budget in February through its pre-budget representations. The proposals are not binding, leaving the final decision with the government.

Foreign investors also pay 20% short-term tax and transaction charges

SEBI’s proposal addresses a tax structure in which foreign investors pay 20% short-term capital-gains tax on securities sold before the more-than-a-year holding threshold. Securities transaction taxes apply to trades, and withholding taxes apply to dividends.

SEBI said transaction costs associated with investing in Indian equities were among the highest across jurisdictions. The tax and transaction charges formed part of the regulator’s representations on foreign-investor costs.

SEBI proposes no taxable sale for mutual-fund switches after one year

For domestic investors, SEBI recommended that moving from one mutual-fund scheme to another not be treated as a taxable sale when the units had been held for more than a year. The proposal covers investors selling existing holdings to invest in new mutual-fund schemes.

Domestic mutual funds held ₹82.6 lakh crore in assets under management. Monthly investment schemes brought an average of ₹30 billion into domestic mutual funds each month.

Investor meetings preceded the pre-budget recommendations

SEBI’s recommendations followed scores of meetings with foreign investors over the last two years. The regulator received calls to change India’s tax treatment as a consistent piece of feedback, as foreign-stock selling persisted and put pressure on the Indian currency.

Foreign investors sold $31 billion in Indian stocks this year. Over the last two years, the Nifty 50 declined 4.8%, while the MSCI emerging-market index rose 40%.