Equity LTCG tax cut could boost foreign inflows, support rupee: Jefferies

Jefferies says an equity LTCG tax cut could improve FPI sentiment and support the rupee, but warns that the fiscal impact of lower tax collections may limit the scope for relief.

A cut in long-term capital gains (LTCG) tax on equities could help revive foreign investor flows and support the rupee, with foreign portfolio investors (FPIs) pulling $21 billion out of Indian equities in FY26 and another $16.5 billion in the current financial year up to October 23, said brokerage Jefferies.

 

The centre would need to balance the potential financial impact of any tax reduction, it added.

 

Potentially, better FPI sentiment can support both equities & ₹ given positioning. Flows suggest capital intensive sectors like financials, energy, consumer technology can benefit the most if FPI flows rise,” it added in an October 28 report after chatter around a potential equity LTCG tax cut.

 

 

The brokerage outlined three possible options for equity taxes — an across the board reduction in LTCG and short-term capital gains tax rates, an FPI-specific LTCG rate cut, or computation of gains for FPIs in US dollar terms which may involve some indexation benefits.

 

It added that an out of budget capital-gains tax rate change is feasible through the ordinance route, such as the recent tax relief granted to specific foreign investors in the Indian government bonds.

 

The tax relief in G-Secs has led to a pickup in the debt FPI inflows during June-July at $9 billion, the report noted, adding that an equity LTCG cur may similarly help improve FPI sentiment and flows.

 

“LTCG on equites is exempt for FPIs in several emerging markets (EMs). In India, FPIs have a tax incidence similar to other investors (which is 12.5 per cent on LTCG and 20 per cent on STCG) which has historically been the case. Notably, though FPIs earlier used to benefit from investments via tax friendly jurisdictions under Double Tax Avoidance Agreements (DTAAs), the routes for which have been largely closed since Apr19. However, chances of a differential treatment for FPIs on equity taxation cannot be ruled out,” the brokerage noted.

 

However, the financial impact could constrain the scope for a reduction. Equity LTCG tax collections stood at ₹1.3 trillion in FY25, while securities transaction tax collections are running at an annualised rate of around ₹ 85,000 crore in FY27, the report said. Together, equity LTCG tax and STT accounted for 8 per cent of direct tax collections and 5 per cent of gross tax revenue in FY25.