SEBI backs removal of LTCG tax for foreign investors
What's the story
The Securities and Exchange Board of India (SEBI) has recommended the government scrap the long-term capital gains (LTCG) tax on foreign investors. The move comes as part of efforts to boost India's underperforming equity markets, two sources familiar with the matter told Reuters. The recommendations were made ahead of February's annual budget and are not binding; the final decision lies with the government.
Tax relief
Proposed exemptions for domestic mutual fund investors
Along with the LTCG exemption, SEBI has also suggested tax relief for domestic mutual fund investors.
The board has proposed that these investors should be exempt from LTCG when they switch from one mutual fund scheme to another if the units have been held for more than a year.
This is aimed at encouraging investors to stay invested in domestic mutual funds.
Investor response
Recommendations after meetings with foreign investors
The recommendations from SEBI come after several meetings with foreign investors over the last two years.
One of the main concerns raised by these investors has been the need to change India's tax policies.
"The proposals are aimed at reducing the upfront tax burden on foreign investors," one source told Reuters, highlighting that these suggestions are part of its pre-budget representations and remain confidential for now.
Market challenges
Transaction costs among highest globally
SEBI has noted that transaction costs for equity investments in India are among the highest globally.
Currently, investors pay a long-term capital gains tax of 12.5% on securities held for over a year and short-term capital gains tax of 20%.
This is in addition to securities transaction taxes on trades and withholding taxes on dividends.
These high costs have been cited as a deterrent for foreign investment in India's equity market.
Potential impact
Potential impact on market and foreign investment
Brokerage firm Jefferies has said that any reduction in capital gains taxes could make the market more attractive for foreign investors and boost portfolio inflows.
Another brokerage firm, IIFL, estimates that scrapping capital gains tax could increase foreign investors' returns by 2.3% points.