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

In India, the government is discussing potential policy options to rationalize equity taxation for foreign portfolio investors (FPIs), according to investment firm Jefferies. Alternative tax structures under consideration include an across-the-board capital gains tax cut, a specific reduction in LTCG tax for FPIs, and a change in the method of computing gains for FPIs in US dollar terms, resulting in some indexation benefits.

Historically, FPIs in India have paid a 12.5% tax on long-term capital gains (LTCG) and 20% on short-term capital gains (STCG), similar to other investors. However, foreign investors' benefits from investments through Double Tax Avoidance Agreements (DTAAs) have been limited since April 2019. Jefferies notes that discussions surrounding a potential LTCG tax cut for FPIs have gained momentum, with an out-of-budget tax rate change potentially feasible through the Ordinance route, as seen in tax relief granted to foreign investors in Indian government securities in June.

The fiscal impact of potential tax cuts is being evaluated, as equity LTCG tax collections in FY25 were Rs 1.3 lakh crore. The government has budgeted to collect Rs 73,700 crore from securities transaction tax (STT) in the current fiscal, up from Rs 57,522 crore in the previous fiscal, with STT collections surging by 52% between April 1 and October 14, 2026.

An equity LTCG tax cut could potentially improve FPI sentiment and inflows, supporting the Indian rupee, as seen with a USD 9 billion inflow into debt during June-July 2026 following tax exemption announced for foreign investors in government securities.