LTCG Tax Cut For FPIs Among Options Before Government As Jefferies Flags Potential Boost To Rupee And Investor Flows

New Delhi, October 29, 2026: An across-the-board capital gains tax cut, an FPI-specific long-term capital gains (LTCG) tax rate cut, and a change in the method of computing gains for foreign portfolio investors (FPIs) in US dollar terms are among the policy options before the government to rationalise equity taxation in India, investment banking and capital markets firm Jefferies has said.

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It said the possibility of differential tax treatment for foreign portfolio investors in equity cannot be ruled out, as long-term capital gains on equities are tax-exempt for FPIs in several emerging markets.

Historically, FPIs in India have had a tax incidence similar to that of other investors, with a 12.5 per cent tax on LTCG and 20 per cent on short-term capital gains (STCG).

Jefferies said that although FPIs earlier benefited from investments through tax-friendly jurisdictions under Double Tax Avoidance Agreements (DTAAs), these options have been largely closed since April 2019.

Earlier, foreign investors could use treaty benefits to reduce or avoid Indian capital gains tax on their investments in Indian equities. However, with the renegotiation of DTAAs, such benefits were substantially restricted for new investments.

The US-based investment banking firm said discussions around a potential cut in equity LTCG tax had gained momentum and an out-of-budget tax rate change was feasible through the Ordinance route, such as the tax relief granted to specific foreign investors in Indian government securities (G-Secs) in June.

"For equity taxes, policy options include 1) an across-the-board LTCG & STCG rate cut, 2) FPI-specific LTCG rate cut, or 3) Computing gains for FPIs in USD terms (i.e. some indexation benefits)," Jefferies said in its India Equity Strategy report.

Industry participants suggest that too wide a differential between long-term and short-term rates can be suboptimal, it added.

Fiscal Impact Of Potential Tax Cuts

Jefferies said equity LTCG tax collections were Rs 1.3 lakh crore in FY25, coinciding with the peak in Indian markets, and could be lower now.

Combined, LTCG tax on equities and securities transaction tax (STT) accounted for 8 per cent of direct tax revenue and 5 per cent of total gross tax revenue in FY25.

"Given fiscal pressures, government may need to offset potential revenue loss from any LTCG tax reduction," Jefferies said.

The government has budgeted to collect Rs 73,700 crore from STT in the current fiscal, up from Rs 57,522 crore collected in the last fiscal.

Between April 1 and October 14 this fiscal, STT collections surged about 52 per cent to Rs 46,840 crore.

Potential Boost To Rupee

Jefferies said an equity LTCG tax cut may help improve FPI sentiment and inflows, providing support to the Indian rupee.

It cited the impact of tax relief announced in June for foreign investors in G-Secs, which resulted in a pickup in FPI inflows into debt during June-July 2026, amounting to USD 9 billion.

In June, the government had announced tax exemption on interest and capital gains from G-Secs for eligible foreign investors, alongside Reserve Bank of India measures easing FPI investment restrictions in G-Secs.

Equity Tax Norms In Other Countries

Long-term capital gains are exempt from tax for foreign investors in countries such as Taiwan, the US, Indonesia and Hong Kong. In Brazil, too, they are exempt, except when the investment is from a low-tax jurisdiction.

In Japan, LTCG is tax-exempt for foreign investors, except in the case of land-rich companies or substantial ownership.

South Korea levies an 11 per cent tax on sales proceeds or 22 per cent on net gains, while in China, gains on some shares are exempt and others are taxed at 10 per cent.

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GST Relief For Overseas Investors

Brokerage paid by overseas clients, including FPIs, non-resident Indians (NRIs) and overseas citizens of India (OCIs), from repatriable Indian rupee accounts will qualify as exports and, therefore, will not attract GST, according to a Central Board of Indirect Taxes and Customs (CBIC) circular issued earlier this week.

Jefferies said this would potentially reduce the cost of investing and comes at a time when tax cuts for investors are being discussed.

(Disclaimer: Except for the headline, this article has not been edited by FPJ's editorial team and is auto-generated from an agency feed.)

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