Union Budget 2026 | 'Tax incentives to FPIs won't help, make LTCG zero for all': Samir Arora

As the government weighs tax incentives for foreign portfolio investors in the Budget 2026, Helios Mutual Fund's Samir Arora has cautioned that such measures could add complexity without delivering the desired turnaround in foreign inflows.

Arora was reacting to reports that the government is considering tax relief for foreign investors - such as pension and endowment funds - as a possible sentiment booster. "Reading that the govt may give tax incentives to foreign investors like pension funds and endowments etc. This will not help at all and in fact will create more confusion," he wrote on X.

He flagged structural challenges in implementing selective tax relief, pointing out that many large global investors do not invest directly into Indian equities. "a) Many pension funds/endowments buy US/foreign listed and traded Indian ETFs. Many pension funds/endowments buy into actively managed funds which have a mix of different types of investors. so how will the benefit work where the tax is at fund/ETF level?" he asked.

The veteran investor said the core issue lies in how Indian tax law treats pooled investment. "Taxable entity in front of Indian tax authorities is the pooled Fund and not the underlying individual investors, and there is no way to isolate the taxes of underlying investors and charge some and waive for others," he said.

He also questioned the effectiveness of targeted tax incentives in reversing foreign institutional investor sentiment, especially in the short term. "What India and govt need to see is ‘sort of’ quick reversal of FII sentiment and flows. In fact the slowest response is normally from the Long term investors," he said.

Arora added that even if incentives were announced, long-term investors would take time to adjust their investment structures. "First, they will be confused about what new structure to adopt (investing direct vs., through funds/ETFs) and then anyway, since their process is slow, we will see not much change in flows for plus/minus a year," he said.

Instead, the investor argued that a broad-based reduction in capital gains taxes would be more effective in restoring confidence. "It is just easier to reduce/eliminate the taxes - perhaps just make LTCG zero beyond one year for all investors, including domestic investors," he said.

He acknowledged that concerns about revenue loss could arise, but suggested an alternative mechanism if needed. "If there is a perceived loss (I think there will be massive gains in confidence, animal spirits, higher investment, higher FX reserves etc) that may be (but should not be) adjusted via STT," Arora said.

He added that such an approach could also align with regulatory objectives. "This will also achieve the govt/SEBI objective of reducing speculation, F&O volumes etc.," he said.

The government is considering measures to revive foreign portfolio inflows. Sources told Business Today that options under discussion include extending capital gains tax exemptions currently available to sovereign wealth funds to designated pension and endowment funds, or rolling back the long-term capital gains tax rate for FPIs from 12.5 per cent to 10 per cent.

Finance Minister Nirmala Sitharaman had raised the LTCG tax rate from 10 per cent to 12.5 per cent in the Union Budget 2024.

FPIs pulled a record Rs 1.6 lakh crore from Indian equities in 2025 - the highest annual outflow ever - sparking concerns over Securities Transaction Tax revenue losses for the government. Market watchers cite the capital gains tax hike as one factor pushing foreign investors away, alongside US tariff fears, rupee weakness, and high valuations.