FM Nirmala Sitharaman Open to Reviewing FPIs’ Concerns Over LTCG Tax Reduction

Sitharaman Says Government Will Examine FPIs’ Demands for LTCG Tax Relief Amid Record Outflows

Finance Minister Nirmala Sitharaman on Monday indicated that the government was open to examining concerns raised by foreign portfolio investors (FPIs) regarding India’s capital gains tax regime. Responding to demands for a reduction in long-term capital gains (LTCG) tax, she said the government would consider the issues raised by investors and “see what we can do”.

Speaking at the Financial Express Leadership Awards, Sitharaman acknowledged the concerns surrounding taxation and declining foreign investment but stressed that any decision would require careful consideration of multiple factors.

“These are very delicate matters, and a lot of business and commercial acumen will have to come into play,” she said.

The Finance Minister noted that India’s tax structure had remained unchanged even during 2023, when foreign investment inflows reached record levels. However, she acknowledged that the investment environment had subsequently changed, with foreign institutional investors stepping up their withdrawals.

“The taxation structure was what it is today even in 2023, when inflows were at record highs,” she said.

“Today, the circumstances have changed. FII outflows have happened, and voices of concern are louder. I will consider all this,” she added.

Sitharaman also highlighted the importance of equity investments in supporting India’s economic ambitions. She said sustaining economic growth of 7% or above would require significant capital, particularly through equity markets.

She further recognised the demand for providing equity markets with support similar to that extended to the debt market.

“We also have this voice that equity needs the kind of support given to the debt market. I recognise this voice,” the Finance Minister said.

SEBI PROPOSES LTCG TAX EXEMPTION FOR FOREIGN INVESTORS
The debate over capital gains taxation has gained momentum following a reported recommendation by the Securities and Exchange Board of India (SEBI) to the government to abolish LTCG tax for foreign investors.

According to a Reuters report citing two people familiar with the development, the market regulator has also proposed tax relief for domestic mutual fund investors. The suggestion involves exempting investors from LTCG tax when they sell existing holdings and reinvest the proceeds in fresh investments.

The proposals come amid growing concerns about foreign investors reducing their exposure to Indian equities.

FPIs WITHDRAW RS 3.08 LAKH CRORE FROM INDIAN STOCKS
Foreign portfolio investors pulled out a record Rs 3.08 lakh crore, equivalent to $32.73 billion, from Indian equities between January and September 2026.

The withdrawal was almost twice the Rs 1.66 lakh crore that foreign investors took out of the Indian equity market during the entire 2025 calendar year.

The persistent selling has raised questions about India’s competitiveness as an investment destination and intensified calls for a review of the tax framework governing equity investments.

UNDERSTANDING INDIA’S CURRENT LTCG TAX RULES
Under the existing tax regime, long-term capital gains from the sale of listed equity shares and equity-oriented mutual funds attract a tax of 12.5%, in addition to applicable surcharge and cess. The tax applies to annual gains exceeding Rs 1.25 lakh.

For an investment to qualify as a long-term capital asset, listed shares and equity-oriented mutual fund units must generally be held for more than 12 months.

Investments sold within 12 months of purchase are classified as short-term capital gains (STCG) and taxed at 20%, along with applicable surcharge and cess.

Any potential revision to these rates could have implications for foreign investors, domestic market participants and the broader Indian equity market.