Budget 2027: Can LTCG tax cut stem FPI outflows and bring foreign investors back to Indian equities?

Market participants across investor categories have called for a review of Long-Term Capital Gains (LTCG) tax and Securities Transaction Tax (STT). The government has reportedly begun consultations with investors, market intermediaries and tax experts to reassess the levies, according to an Economic Times report citing sources. The discussions come amid sustained selling by foreign portfolio investors (FPIs) in Indian equities. Finance Minister Nirmala Sitharaman acknowledged the need for a healthy debate on the issue on October 13. She also noted that LTCG and STT had featured frequently in her interactions with domestic and global investors, as preparations for the next Union Budget gather pace.

With Indian stocks underperforming global peers, the rupee weakening against the dollar and overseas investors pulling out record sums, market participants are calling for a more competitive tax regime.

Can LTCG tax cut bring foreign investors?

While some experts argue that easing the tax burden could improve India’s appeal, global interest rates, currency movements, relative valuations and earnings growth will continue to influence foreign investors’ allocation decisions.

The benchmark Nifty 50 has declined 13.1% year-to-date as of October 26, making it one of the weakest-performing major global indices. In comparison, Taiwan’s TWSE has gained 59%, South Korea’s KOSPI has risen 29.8% and Japan’s Nikkei has advanced 23.5%. The US S&P 500 has gained 11.4% over the same period.

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Foreign investors have pulled out ₹3.07 lakh crore from Indian equities so far in 2026 until October 23, according to data cited by Grant Thornton Bharat executive director Chintan Hefa. The rupee has also depreciated 5.58% against the dollar this year, reducing dollar-denominated returns for overseas investors.

“The common factor is FPI selling affecting indices and currency. Earnings have only improved recently,” said Madan Sabnavis, chief economist at Bank of Baroda.

Can tax relief improve India's appeal?

Under the current regime, eligible long-term capital gains on listed equities and equity-oriented mutual funds exceeding ₹1.25 lakh annually are taxed at 12.5%. Short-term capital gains on specified equity transactions are taxed at 20%, while STT is levied separately on applicable transactions.

Market participants have argued that the combination of LTCG tax and STT increases transaction costs and puts India at a disadvantage against competing financial centres. Several markets, including Singapore and Hong Kong, generally do not levy capital gains tax on non-residents’ securities investments, although the treatment depends on the investor and nature of the income.

SBI Research has called for abolishing LTCG tax on equities while extending the qualifying holding period to two or three years from one year. The proposal aims to encourage longer-term foreign investment rather than short-term, opportunistic flows.

In its Ecowrap report, SBI Research said India needed to address structural issues affecting capital inflows, including taxation. It also called for substantially lower taxation for investors holding equities for a reasonable period, such as three years.

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The proposal comes amid sustained foreign selling. SBI Research estimates that cumulative FPI equity outflows reached ₹3.51 lakh crore between 2021 and September 2026, with 2023 the only year during the period to buck the broader trend.

Tax is not the only factor

A reduction in LTCG tax, however, may not be sufficient to reverse the outflows. The Nifty’s price-to-earnings ratio has declined to 20.4 from 24.45 at the end of 2025, but India remains more expensive than most major markets, including Japan at 19.9.

Meanwhile, higher US Treasury yields have made dollar-denominated assets more competitive, while the artificial intelligence-led rally has drawn capital towards Asian markets such as Taiwan and South Korea.

The rupee’s depreciation adds to the challenge, as currency losses can erode returns earned by foreign investors in Indian equities. Corporate earnings growth and the relative attractiveness of other markets will therefore remain important determinants of investment flows.

SBI Research has also warned that persistent inflation, real-rate pressures and fiscal uncertainty could keep long-term yields elevated, creating headwinds for equity valuations.

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What could Budget 2027 change?

The government faces a trade-off between improving market competitiveness and protecting tax revenues. LTCG collections rose to ₹1.29 lakh crore in FY25 from ₹72,249 crore a year earlier, while STT collections reached ₹57,522 crore in FY26.

Budget 2027 could provide an opportunity to review the rates, holding periods and interaction between LTCG tax and STT. But any relief would need to balance the potential benefits of attracting foreign capital against the fiscal cost.

Ultimately, tax reform could remove one obstacle to investing in India. Whether it brings foreign investors back will depend on whether the market also offers competitive valuations, stronger earnings prospects and attractive returns after accounting for currency movements.

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