India Considers Scrapping Foreign Capital Gains Tax Amid Record Outflows

India is considering abolishing the tax on long-term capital gains for foreign portfolio investors. The move aims to halt record outflows from the country's equity markets. Finance Minister Nirmala Sitharaman acknowledged the exit of foreign capital on Monday. She stated she would consider calls to review the tax, according to local media reports.

The proposal follows a recommendation from the country's capital markets regulator. Reuters reported on Monday that the regulator urged the government to scrap the levy. Pressure for a repeal has been building from industry groups. The PHD Chamber of Commerce and Industry appealed to the government last week to abolish the tax. The chamber argued the levy was raised in 2024 when the stock market was near record highs. It contended that current conditions warrant a review.

Foreign interest in Indian equities has fallen to historic lows. Nomura reported on Monday that foreign holdings of Indian stocks stand at an all-time low of 14%. Overseas investors have cashed out a net $18.9 billion in 2025. They have withdrawn more than $30 billion so far in 2026. The Nifty 50 benchmark index has lost nearly 9% this year. India was the world's third worst-performing market after Indonesia and Turkey between January and October.

Market analysts believe removing the levy would improve sentiment. They note it would align India's tax regime with other emerging markets. However, experts caution that a tax cut alone is unlikely to reverse the trend. Amit Bhartia, a portfolio manager at Singapore-based Delorean Partners, said allocators tend to buy expected returns rather than tax breaks. He noted that foreign investors put about 570 billion rupees into Indian equities in September 2024. They pulled out 940 billion rupees the following month to chase cheaper Chinese stocks. Bhartia observed that the tax rate did not change between those months, but the perceived relative return did.

Several risks continue to weigh on Indian markets. These include strained ties with the United States, higher energy prices, and a depreciating currency. Uncertainty over the impact of artificial intelligence also contributes to the pressure. Nomura said a capital gains tax cut, a drop in global bond yields, and expectations that the rupee will hold up would lend support. The bank warned that geopolitical and technological uncertainty persists over the longer term.

Bernstein said in a Monday report that India must now fight for capital. The firm argued that multiple catalysts are needed to reverse the outflows. These include a tax cut and an easing of tensions in the Middle East. Bernstein's data shows India trading at a rolling 12-month forward price-to-earnings ratio of 18.6 times. This is higher than Taiwan's 16.8 times and Korea's 3.9 times. Emerging markets on average are expected to deliver a 45% improvement in earnings, while India's forecast is a slower 11%.

Hanna Luchnikava-Schorsch, head of Asia-Pacific economics at S&P Global Market Intelligence, told CNBC that a tax cut will not trigger a major reallocation into Indian equities. She stated the fundamental trade-off facing foreign investors remains unchanged. Investors still need earnings growth to justify the valuation premium. Tentative signs of a turn have emerged as cracks appear in the global AI rally. LSEG data shows Indian benchmark indexes have outperformed global peers over the past month. Foreign capital flows at the start of this month have been positive.