SEBI Recommends LTCG Tax Relief for Foreign Investors Ahead of Budget 2027

SEBI reportedly recommends removing LTCG tax for foreign investors and easing mutual fund switch taxation ahead of Budget 2027.

Mumbai, November 2, 2026: India's capital markets regulator, the Securities and Exchange Board of India (SEBI), has reportedly recommended changes to the country's capital gains taxation framework in an effort to improve foreign investment flows and encourage long-term participation in domestic mutual funds.

According to a Reuters report published on November 2, SEBI has proposed that the government consider abolishing long-term capital gains (LTCG) tax for foreign investors. It has also reportedly recommended exempting domestic mutual fund investors from tax when they switch between eligible investments after holding them for more than a year.

The recommendations were reportedly submitted ahead of the Union Budget scheduled for February 2027. However, the proposals are non-binding. They do not mean that the government has approved a tax reduction or that investors can immediately stop paying the applicable taxes.

Why SEBI is reportedly considering tax changes

Foreign investment is an important source of capital for India's equity markets. Foreign portfolio investors participate in listed companies, government securities and other financial instruments.

However, taxation is one of several factors that influence investment decisions. Currency movements, corporate earnings, economic growth, market valuations and global interest rates also affect how international investors allocate money.

Reuters reported that foreign investors had sold approximately $31 billion worth of Indian equities during the year, adding to concerns about sustained overseas outflows.

SEBI's reported recommendation is intended to make India's equity market more attractive to international investors and encourage longer-term participation.

What is long-term capital gains tax?

Long-term capital gains tax is levied on profits earned from selling certain investments after they have been held for a specified period.

For listed equity shares and equity-oriented mutual funds in India, the applicable holding-period rules and tax thresholds determine whether gains are classified as short-term or long-term.

Under the existing framework reported by Reuters, the long-term capital gains tax rate applicable to relevant equity gains is 12.5%, subject to the applicable provisions and exemptions.

SEBI's reported recommendation to remove this tax for foreign investors would represent a significant policy change if the government accepted it.

What about domestic mutual fund investors?

The recommendation reportedly also covers certain switches between domestic mutual fund investments.

Investors sometimes move money from one mutual fund scheme to another to adjust their portfolios, manage risk or change their investment strategy.

Under existing tax rules, a switch or redemption can have tax consequences because it may be treated as a transfer of units.

The reported SEBI recommendation seeks an exemption for qualifying switches after a holding period exceeding one year. The exact scope, eligibility conditions and implementation details would depend on any formal government proposal.

Has the government approved the proposal?

No approval has been announced in the reporting cited here.

It is important to distinguish between a regulator's recommendation and an official change in tax law.

In a July 2026 parliamentary response, the government had said there was no proposal under consideration to abolish long-term capital gains tax on equities. It also stated that taxation measures are reviewed through the annual Budget process.

The reported SEBI recommendations are a later development, but they do not by themselves change the law.

Any change would require an appropriate government decision and, where necessary, legislative amendments.

What could this mean for India's stock market?

If the recommendations are accepted, the changes could potentially:

• Improve the tax attractiveness of Indian equities for foreign portfolio investors.

• Encourage international investors to consider longer investment horizons.

• Make certain mutual fund portfolio switches more tax-efficient.

• Influence foreign capital flows and market liquidity.

However, tax changes alone cannot guarantee an increase in foreign investment. Investors also consider political stability, economic growth, company performance, market valuations and global financial conditions.

What investors should do now

Retail investors should not make investment decisions based on an unapproved tax recommendation.

Existing tax provisions continue to apply unless the government officially announces and implements changes.

Investors should check official Finance Ministry announcements, Budget documents and notifications from the Central Board of Direct Taxes before making decisions based on possible tax benefits.

The reported SEBI proposals could become an important subject of discussion in the run-up to the Union Budget 2027. Their final outcome will depend on the government's response.

By News National Editorial Team

Sources: Reuters – SEBI's reported tax recommendations · Business Standard – Government's July 2026 tax clarification

image source:https://www.newindianexpress.com/business/2025/Aug/22/sebi-gets-three-new-executive-directors