Daijiworld Media Network - New Delhi
New Delhi, Nov 9: India’s $900-billion asset management industry has urged the Narendra Modi government to abolish capital gains tax on foreign investors, arguing that the move could make the country’s financial markets more attractive and encourage greater investment in equities and fixed-income securities.
Fund managers have also called for long-term gains from debt mutual funds to be taxed on a par with equities, saying the existing tax treatment discourages investment in bonds and other fixed-income instruments. Uncertainty surrounding tax regulations has also created difficulties for overseas investors, including major private equity firms that route investments through foreign entities to manage their tax liabilities.
The demand comes amid a prolonged period of weak performance by Indian equities compared with several emerging markets. Foreign investors are on course to withdraw money from Indian stocks for a third consecutive year, with outflows approaching a record $27 billion in 2026, according to the report.
Asset managers argue that scrapping capital gains tax for foreign investors would improve their post-tax returns, an important consideration when allocating funds across markets. The depreciation of the rupee against the US dollar has further increased the importance of returns after currency and tax adjustments.
“We need to showcase to the foreigners we want them,” Edelweiss Financial Services chairman and managing director Rashesh Shah told Bloomberg Television. He said removing capital gains tax for foreign investors could be a relatively easier way to make India an attractive long-term investment destination.
Currently, long-term gains on listed equities held for more than a year are taxed at 12.5 per cent, while short-term gains are taxed at 20 per cent. Finance Minister Nirmala Sitharaman has indicated that the government would consider changes to stock-related taxes but has not confirmed whether capital gains or transaction taxes would be revised.
A recent global selloff in artificial intelligence-related stocks and a decline in oil prices provided some relief to Indian markets. Foreign investors put more than $3.5 billion into Indian equities in the week through Thursday, helping the market record its strongest weekly performance in more than five years.
India’s relatively limited exposure to the artificial intelligence investment boom, along with slower corporate earnings growth, had earlier contributed to foreign investors shifting funds towards technology-heavy markets in North Asia.
Saurabh Mukherjea, founder and chief investment officer of Marcellus Investment Managers, has argued that India's tax treatment of foreign portfolio investors is increasingly out of step with international practices. In a recent note, he said the US, the UK, Germany, Japan and major emerging markets such as South Korea, Brazil, China and Taiwan exempt such foreign portfolio inflows from tax.
The capital gains levy on foreign portfolio investors was introduced in 2018. Sitharaman has previously pointed to strong capital inflows in 2023 and 2024 despite the tax being in place. However, former Securities and Exchange Board of India whole-time member Ananth Narayan said India had recorded net outflows from foreign portfolio investors since 2019.
The fund management industry is also seeking changes to the taxation of debt mutual funds. Unlike equity investments, long-term gains from debt funds are generally taxed at the investor's applicable income-tax slab rate, a system fund managers say makes them less attractive.
Mihir Kapadia, chairman of London-based Sun Global Investments, said the government and regulators should encourage greater investment in fixed-income and bond markets. He pointed to the potential for increased fundraising through dollar-denominated and rupee-denominated masala bonds, which are issued in overseas markets.
Srinivas Jain, joint chief executive of SBI Funds Management, said investors needed stronger incentives to allocate money to debt instruments. Higher taxation on gains, he said, weakens that incentive and makes it more difficult to build balanced investment portfolios.