Will cutting capital gains tax alone bring back FIIs to Indian equities?

At Business Standard Manthan 2025, Samir Arora set the cat among the pigeons when he argued for the abolition of capital gains tax to bring back FIIs to Indian markets

Merely cutting or even abolishing capital gains tax—whether long term or short term—on the sale of shares will not be enough to bring foreign investors back to the Indian stock market, analysts believe. While they agree this is a step in the right direction, they say additional policy measures are needed to ensure foreign investors stay.

 

“Undoubtedly, lowering capital gains tax will increase post-tax returns for investors,” said Nilesh Shah, managing director, Kotak Mahindra AMC. “However, only a reduction in taxes does not guarantee returns. Other measures may be needed to attract FPIs.” 

 

“Measures that can be undertaken include a quota in initial public offers (IPOs) and offers for sale (OFS) for FPIs at a significant discount to the issue price; preference over other investors in secondary market trade execution if it is favourable to FPIs; guaranteed returns by the government on FPI investments; and exemption from know your customer (KYC) and income tax return (ITR) filing. Some of these measures would be introduced globally for the first time and are not offered by any peers. This package will undoubtedly attract FPIs to invest in India,” Shah added.

 

Meanwhile, abolishing capital gains tax for foreign investors would help deepen Indian capital markets and make them more vibrant, Samir Arora, founder and chief investment officer of Helios Capital, argued at the Business Standard Manthan Summit 2025.

 

Of the 200 countries globally, 199 do not impose any tax on investments by foreign investors in stock markets, Arora said.

 

Foreign investors also lose money on currency fluctuations, he explained, as the tax is paid in Indian rupee terms, which then gets converted into dollars and repatriated. 

 

“In the last seven years, the Indian market is up around 12 per cent, and 7–8 per cent (pre-tax) in dollar terms per annum. In 2022-23, India collected Rs 99,000 crore from capital gains tax (around $10 billion). This is not an annual figure but one seen at the peak of a stock market cycle. In a five- or seven-year cycle, we see such numbers in just one year. In other years, it would be just $2–3 billion. The government needs to respect the markets and the FIIs,” Arora said.

 

History of capital gains tax in India

 

Capital gains tax was introduced in 1946-47 but was made permanent by T T Krishnamachari in 1956. At the time, capital gains up to Rs 15,000 were exempt from tax. A progressive, slab-wise tax rate was applied to amounts above Rs 15,000, with a 31.3 per cent tax on the highest category, which included amounts over Rs 10 lakh.

 

In the Budget for 2024, Finance Minister Nirmala Sitharaman changed the taxation on capital gains, F&O income, and the new tax regime. 

 

Short-term capital gains (STCG) tax was increased to 20 per cent (from 15 per cent), while long-term capital gains (LTCG) tax on all financial and non-financial assets was raised to 12.5 per cent (from 10 per cent). The exemption limit for LTCG was increased to Rs 1.25 lakh per year. Securities transaction tax (STT) on F&O was increased to 0.02 per cent (from 0.01 per cent) for futures and 0.1 per cent (from 0.06 per cent) for options.

 

Market sell-off

 

The recent selling in Indian equities, according to Jitendra Gohil, chief investment strategist at Kotak Alternate Asset Managers, is not driven by tax-related issues but by the high valuations of Indian stocks, a stronger dollar, and the absence of major reforms to accelerate growth.

 

India’s political and financial risk premium, he said, has been falling, and what FPIs and long-term investors need is a growth spurt via reforms—particularly in land, labour, agriculture, and politics.

 

“The government has clearly backtracked on its reform agenda, especially on privatisation and disinvestment, and growth-supportive policies are lacking. However, going forward, we believe the Modi government will face fewer political headwinds, which may help bring the reform agenda back on track,” Gohil said. 

 

Since the correction that began in October 2024, FPIs have sold Indian stocks worth over Rs 2 trillion, data suggests. The Sensex and the Nifty have declined by around 13 per cent and 14 per cent, respectively, during this period. The midcap and smallcap indices on the NSE have seen sharper cuts of 19 per cent and 23 per cent, respectively, data shows.

 

“When an investor enters or exits India, it is imperative that we treat them at par with investors in other countries—especially those in emerging or capital-starved economies. We need capital on a consistent basis until we grow into a developed economy. Only then can we think of imposing taxes that are on par with those in developed countries. Cutting LTCG for foreign investors will make India more attractive—both from a growth and a return perspective,” said Vaibhav Sanghavi, chief executive officer at ASK Hedge Solutions