Sebi Backs Removal of LTCG for Foreign Investors, Says Report: What the Proposal Means, Why FPI Outflows Hit Rs 3.04 Lakh Crore in 2026 and What Changes for Indian Investors

LTCG for foreign investors could soon be a thing of the past, if a report is right. Sources told a news agency that Sebi has backed removing long-term capital gains (LTCG) tax for foreign portfolio investors (FPIs), and has separately proposed tax relief for domestic mutual fund investors who switch holdings. This explainer on LTCG for foreign investors covers what has been reported, what the law says today, why the government is under pressure, and what it could mean for your investments.

This is based on media reports citing unnamed sources and on public data. No notification or Budget announcement has been made, so treat it as a proposal and not a rule.

Click Here – Get Free Investment Predictions

What Has Sebi Proposed on LTCG? Reported Details

Item	Reported position
Foreign investors	Sebi backs removing LTCG tax on equities for FPIs, per a report citing sources
Domestic mutual fund investors	Proposed exemption from LTCG if they sell existing holdings to invest in new ones
Status	A proposal sent to the government; not yet law
Timeline signalled	Finance ministry decision likely in Union Budget 2027-28, per Business Today
Government concern	Keeping tax parity between domestic and foreign investors and avoiding round-tripping of funds

Source: Reuters report as carried by Zee Business, Business Today (27 October 2026) and other media. Details of the mutual fund proposal, such as limits and eligible schemes, have not been published.

LTCG Tax on Equities Today: What the Law Says

Long-term gains on listed equity shares and equity-oriented mutual funds, held for more than 12 months, are taxed at 12.5% under current law, and the Union Budget 2026 retained this rate. Domestic investors get an annual exemption on gains up to Rs 1.25 lakh, while FPIs are taxed at 12.5% on long-term gains under Section 115AD of the Income-tax Act. Listed equity was exempt from LTCG until 2017; the tax was reintroduced in 2018 at 10% and raised to 12.5% in the 2024 Budget.

Check the Univest Screener for stocks with strong long-term returns

Why Is the Government Considering LTCG Relief? FPI Outflows

The Sebi LTCG proposal is driven by FPI outflows. SBI Research's Ecowrap report of 12 October said foreign investors withdrew Rs 44,166 crore from equities in October up to that date, taking 2026 outflows to Rs 3.04 lakh crore, already well above the Rs 1.66 lakh crore for all of 2025. The Nifty was down about 13% for 2026 in one report, and the rupee has been under pressure. Foreign investors turned net buyers last week for the first time in ten weeks, but the larger trend remains negative.

On LTCG for foreign investors, India's tax regime for foreign equity investors is seen as less attractive than those of China and South Korea, according to Business Today. FPIs have asked for LTCG relief and lower securities transaction tax (STT) in meetings with the government and Sebi. The government has already acted on bonds: an ordinance scrapped the 12.5% LTCG and 20% withholding tax on government securities for FPIs from 1 April 2026.

What Other Options Are on the Table?

FPI outflows have led SBI Research to urge scrapping LTCG on equities altogether and extending the qualifying holding period to two or three years. Another suggestion is to abolish capital gains tax for FPIs while raising STT slightly to keep the change revenue-neutral. Finance Minister Nirmala Sitharaman said on 13 October that LTCG and STT concerns had come up often in her meetings with investors, and consultations are under way. The Centre also faces higher subsidy costs because of the West Asia conflict, which limits how much revenue it can give up.

What the Proposals Mean for Indian Investors

Investor	Today	If the proposals become law
Foreign investors (FPIs)	12.5% LTCG on listed equity	No LTCG tax, so higher post-tax returns
Resident equity investors	12.5% above the Rs 1.25 lakh annual exemption	No change unless Parliament extends relief
Mutual fund investors who switch schemes	Gain on selling is taxable	Gain could be exempt if reinvested, per the proposal

Any Sebi LTCG proposal would need to be passed by Parliament, most likely through the Budget, so it will not apply to your transactions now. If the reinvestment relief for domestic mutual fund investors is accepted, it would reduce the tax cost of rebalancing, but the conditions are unknown. Do not make tax-driven selling or buying decisions on a report.

Download the Univest iOS App or Univest Android App to track the market impact of FPI flows live.

Will LTCG Removal Bring Foreign Money Back?

On LTCG for foreign investors, tax is one factor among several. Foreign investors also weigh valuations, currency moves, interest rates, geopolitical risk and earnings growth, so a tax cut does not guarantee that outflows stop. It could however improve post-tax returns and sentiment, especially for passive funds and ETFs, which are sensitive to costs.

Conclusion

Sebi's reported backing for removing LTCG for foreign investors shows the government is looking for ways to stop record FPI outflows. Until it is announced in a Budget and passed by Parliament, the 12.5% LTCG rate stands for everyone. Watch Budget 2027-28 for the decision and for the mutual fund reinvestment relief.

Frequently Asked Questions on LTCG for Foreign Investors

What has Sebi proposed on LTCG for foreign investors?

Ans. According to a report citing sources, Sebi has backed removing long-term capital gains tax for foreign portfolio investors on equities and sent a proposal to the government. It has also proposed exempting domestic mutual fund investors from LTCG if they sell existing holdings to invest in new ones. Neither idea is law yet.

Has LTCG tax been removed for foreign investors?

Ans. No. As of 2 November 2026 the 12.5% LTCG tax on listed equities still applies to foreign portfolio investors. Only government securities were exempted by an ordinance from 1 April 2026. Any change for equities needs government approval and, most likely, a Budget announcement passed by Parliament.

What is the current LTCG tax rate on equities?

Ans. Long-term gains on listed equity shares and equity-oriented mutual funds held for more than 12 months are taxed at 12.5%. Resident investors get an annual exemption on gains up to Rs 1.25 lakh. The Union Budget 2026 retained the rate. Rules can change, so check the latest income tax provisions.

Why are foreign investors selling Indian equities in 2026?

Ans. SBI Research reported outflows of Rs 3.04 lakh crore in 2026, exceeding the Rs 1.66 lakh crore for all of 2025, amid global market pressure, a weak rupee, higher yields elsewhere and a tax regime foreign investors consider less attractive than China or South Korea. Tax is one of several reasons.

When could the LTCG decision happen?

Ans. Business Today reported on 27 October 2026 that the finance ministry is weighing options, with a decision likely in the Union Budget for 2027-28. The government is concerned about parity between domestic and foreign investors and about round-tripping of funds. Timelines can change, so watch official announcements.

What is the mutual fund reinvestment proposal?

Ans. Sources said Sebi proposed that domestic mutual fund investors be exempt from LTCG if they sell existing holdings to invest in new ones. This would lower the tax cost of switching between schemes. Limits, eligible schemes and conditions have not been published, and the idea is not law, so do not act on it yet.

Will my taxes change if LTCG is removed for FPIs?

Ans. Not automatically. A rule for foreign investors would not change the 12.5% LTCG that resident investors pay unless Parliament also extends relief to them. The domestic mutual fund reinvestment idea would apply only if enacted. Keep following official announcements and consult a tax professional for your own case.

Will removing LTCG stop FPI outflows?

Ans. Not necessarily. Foreign flows depend on valuations, currency, interest rates, earnings and global risk as well as tax. Removing LTCG could improve post-tax returns and sentiment, particularly for passive funds, but it cannot guarantee a reversal. This is not tax or investment advice, so consult a SEBI-registered advisor or tax professional.