Differential treatment for FPIs to across-the-board LTCG tax cut options before govt: Jefferies

Historically, FPIs in India have had a tax incidence similar to other investors (12.5 per cent on LTCG and 20 per cent on STCG). Jefferies said though FPIs earlier benefitted from investments via tax-friendly jurisdictions under Double Tax Avoidance Agreements (DTAAs), these options have been largely closed since April 2019. Earlier, foreign investors could use treaty benefits to reduce or avoid Indian capital gains tax on their investments in Indian equities.

However, with the renegotiations of DTAAs, such benefits were substantially restricted for new investments. The US-based investment banking firm said the chatter around a potential cut in equity long-term capital gains (LTCG) tax has picked up and an out-of-budget tax rate change is feasible via the Ordinance route, such as the tax relief granted to specific foreign investors in Indian G-Secs in June.

"For equity taxes, policy options include 1) an across-the-board LTCG & STCG rate cut, 2) FPI-specific LTCG rate cut, or 3) Computing gains for FPIs in USD terms (i.e. some indexation benefits)," Jefferies said in its India Equity Strategy report. Industry participants suggest that a too-high differential between long-term and short-term rates can be suboptimal, it added. Jefferies said equity LTCG tax collections were Rs 1.3 lakh crore in FY25, coinciding with peaking Indian markets, and could be lower now.

Combined, LTCG tax on equities and STT were 8 per cent of direct tax and 5 per cent of total gross tax revenue in FY25. "Given fiscal pressures, government may need to offset potential revenue loss from any LTCG tax reduction," Jefferies said. The government has budgeted to collect Rs 73,700 crore from STT in the current fiscal, up from Rs 57,522 crore collected in the last fiscal. Between April 1 and October 14 this fiscal, STT mop-up swelled about 52 per cent to Rs 46,840 crore.

Jefferies said an equity LTCG tax cut may help improve FPI sentiment and flows, providing support to the Indian rupee. It cited the impact of tax relief announced in June for foreign investors in G-Secs, which resulted in a pickup in FPI inflows in debt during June-July 2026 at $9 billion. In June, the government had announced tax exemption on interest and capital gains from G-Secs for eligible foreign investors, alongside RBI measures easing FPI investment restrictions in G-Secs.

EQUITY TAX NORMS IN OTHER COUNTRIES Long-term capital gains are exempt from tax for foreign investors in countries like Taiwan, the US, Indonesia and Hong Kong. In Brazil too, they are exempt except when the investment is from low-tax jurisdiction. In the case of Japan, LTCG is tax-exempt for foreign investors except in case of land-rich companies or substantial ownership. South Korea levies an 11 per cent tax on sales proceeds or 22 per cent of net gain, while in China, the gains on some shares are exempt and others are taxed at 10 per cent

Brokerage paid by overseas clients, including FPIs, NRIs, and OCIs, from repatriable INR accounts will qualify as exports, and hence would not attract GST, according to a Central Board of Indirect Taxes and Customs (CBIC) circular issued earlier this week. Jefferies said this would potentially reduce the cost of investing and comes at a time when tax cuts for investors are being discussed.