Do foreign investors not pay capital gains tax in other countries? Not true

Capital outflows are near their highest-ever figure in India; a debate has raged over whether capital gains tax in India contributed to foreign investor outflows

Foreign investors pay 20 per cent or more as tax on capital gains in certain jurisdictions, including emerging market peers such as Brazil and Mexico, in addition to Saudi Arabia and Uzbekistan, according to data from tax consultancy network PwC.

 

  The headline capital gains tax range for these jurisdictions varies from 20 per cent to 35 per cent for non-resident corporate investors.

 

A debate has raged over whether capital gains tax in India contributed to foreign investor outflows. 

 

“The biggest mistake they (the government) have made, the biggest souring of sentiment, and reality which they have to accept is capital gains tax in India, particularly the foreign investors, is 100 per cent wrong,” said Samir Arora, founder and chief investment officer of Helios Capital at the Business Standard Manthan Summit 2025.

 

“The largest investors in the world and in India are foreign sovereign funds, pension funds, universities, and high net worth individuals (HNIs). Taxing them on their gains, especially when they have no tax set-off available in their home country and when they face forex-related risks, is a big mistake that the government is making,” he had added.

 

To be sure, the tax rates above apply to corporate non-resident investors. Applicable tax rates can vary depending on the structure of the fund, tax treaties and exemptions given by different governments.

 

India imposes a 12.5 per cent tax on long-term capital gains. The short-term capital gains tax 20 per cent. Additional surcharge and cess also applies. There may be treaty exemptions on the final outgo faced by foreign investors.

 

Foreign portfolio investors have been net sellers by Rs 139,757 crore so far in the financial year 2024-25. The highest ever outflows in absolute terms was Rs 140,010 crore in the financial year 2021-22. Outflows have been heavier in the last few months. Total outgo since January is Rs 129,290 crore.

 

Slower earnings growth and valuations have also coincided with foreign outflows.

 

“The market correction has coincided with a slowdown in earnings growth, as the Nifty-50 has managed only 4 per cent PAT growth in 9MFY25 (following a healthy 20 per cent+ CAGR during FY20-24). The expectations for FY26 corporate earnings (19 per cent for the MOFSL Universe and 15 per cent for the Nifty-50) are still somewhat elevated, in our opinion, given the underlying macro-micro backdrop and are thus ripe for further downgrades. The recent correction in broader markets factors in some of the potential disappointments in earnings ahead,” according to the March 2025 Motilal Oswal Financial Services ‘Bulls & Bears’ report authored by research analyst Deven Mistry.