How LTCG Tax Relief for FPIs Works as SEBI Backs Proposal

SEBI’s FPI Tax Proposal Puts India’s Market Appeal in Focus

The recommendation could alter the tax cost of long-term equity investing by foreign portfolio investors, but it is not yet a change in law.

A recommendation, not an enacted exemption

The Securities and Exchange Board of India has backed a proposal to remove LTCG tax for foreign portfolio investors, or FPIs. That is a recommendation, not confirmation that the tax has been scrapped. Until the proposal is accepted and its terms are specified, investors should not treat the suggested relief as an available exemption.

The announcement also leaves important questions open: which investments would qualify, when any change would take effect and whether conditions would apply. Those details matter because a tax proposal can affect investor calculations only once its scope and implementation are clear.

How LTCG works for listed equity

Long-term capital gains are profits made when an asset is sold after being held for a specified period. The threshold and tax treatment vary by asset. For listed shares and equity-oriented mutual funds, a holding period of more than 12 months generally qualifies the gain as long term; the corresponding threshold for land and buildings is more than 24 months.

For eligible listed equity gains, the rate described in the source is 12.5%, following changes announced in the Union Budget 2024. An annual exemption of ₹1.25 lakh applies to specified eligible equity gains, subject to conditions that include securities transaction tax requirements. For listed equity held for 12 months or less, the stated short-term capital gains rate is 20%.

What the calculation shows

Consider shares bought for ₹2 lakh and sold for ₹4 lakh after 18 months. The gain is ₹2 lakh. After the ₹1.25 lakh exemption, ₹75,000 remains taxable; at 12.5%, the tax is ₹9,375, excluding applicable cess and surcharge. This example illustrates the general calculation, not the tax treatment of every investor or FPI.

The distinction between taxing a profit and taxing a sale is also important. India and Brazil tax eligible share-sale profits, while the examples cited for Indonesia and Vietnam apply a 0.1% charge to gross transaction value. China generally exempts individual investors from income tax on gains from mainland-listed shares and imposes a 0.05% stamp duty on sales. These differences offer context, but do not by themselves establish how investors will respond to SEBI’s proposal.

The market significance depends on implementation

If adopted, removing the tax could reduce the tax cost on qualifying long-term gains for FPIs. That may improve the after-tax return calculation for overseas investors considering Indian equities. However, it would not guarantee additional inflows: investment decisions also depend on expected returns and other risks, and the proposal’s eventual scope is not specified in the information available.

For Indian retail investors, the recommendation is relevant as a policy signal, not a reason to assume an immediate change in market demand or personal tax treatment. Any eventual FPI relief would concern the investors and eligible gains covered by the final rules; it should not be confused with the existing framework for other investors.

Key Highlights

• SEBI has recommended removing LTCG tax for FPIs; the recommendation is not yet an enacted exemption.
• The final scope, qualifying investments and timing of any change remain unspecified.
• Eligible listed equity gains are described as taxed at 12.5%, with a ₹1.25 lakh annual exemption subject to conditions.
• Listed equity generally qualifies for long-term treatment after a holding period of more than 12 months.
• The proposal could affect FPI after-tax calculations if adopted, but does not assure additional investment flows.

Investor Note: Treat the SEBI-backed proposal as a possible policy change rather than current tax relief. Investors should rely on the final notified rules to determine eligibility and tax consequences for their own holdings.