SEBI's pre-budget submissions recommend scrapping the 12.5% long-term levy on offshore portfolios while exempting local mutual fund scheme switches held past one year from being taxed as sales. These initiatives seek to address severe market underperformance, with the Nifty 50 dropping 4.8% over two years even as the broader MSCI emerging market index surged 40%. Lowering the country's globally elevated transaction costs could substantially reverse persistent foreign capital flight. Furthermore, brokerage estimates from IIFL suggest that eliminating the capital gains tax could lift foreign investor returns by 2.3 percentage points.
Key points
Eliminating the long-term levy could raise foreign portfolio returns by an estimated 2.3…: Eliminating the long-term levy could raise foreign portfolio returns by an estimated 2.3 percentage points to boost capital inflows.
Domestic mutual fund holders would gain tax-free flexibility when switching between diffe…: Domestic mutual fund holders would gain tax-free flexibility when switching between different investment schemes after a one-year holding period.
The ultimate decision on SEBI's non-binding proposals rests with the federal government a…: The ultimate decision on SEBI's non-binding proposals rests with the federal government ahead of the budget announcement in February.
Sources checked by our analysis pipeline: 1
The Securities and Exchange Board of India (SEBI) has also proposed tax relief for domestic mutual fund investors, suggesting they be exempt from LTCG if they are selling existing holdings to invest in new ones, the sources said.
The recommendations, which come months before the annual federal budget in February, are not binding and a final call rests with the government.
India's equity market has lagged emerging market peers over the past two years. Foreign investors have sold a record $31 billion in Indian stocks this year and overseas investments by retail investors have surged as returns have stagnated.
SEBI's recommendations follow scores of meetings held by the regulator with foreign investors over the last two years as selling persisted, putting pressure on the Indian currency.
One consistent piece of feedback from investors has been the need to change how India taxes them, the sources said.
"The proposals are aimed at reducing the upfront tax burden on foreign investors," one of the two sources said.
The sources declined to be named as the recommendations, which have not been reported previously,…
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