India’s Asset Management Industry Seeks Capital Gains Tax Removal for Foreign Investors Amid Outflows

India’s $900-billion asset management industry is urging the Narendra Modi administration to scrap capital gains tax for foreign investors. The proposed measure aims to make the country's markets more attractive and encourage capital allocation into domestic stocks and fixed-income securities.

The push comes as global funds are on track to withdraw money from Indian equities for an unprecedented third consecutive year, with outflows approaching a record $27 billion in the current year alone. Asset managers point out that removing capital gains levies would improve after-tax returns for foreign entities, a critical metric for portfolio allocation, particularly given the rupee's depreciation against the dollar.

Currently, long-term gains on listed equities held for more than a year are taxed at 12.5%, while short-term returns attract a 20% levy. Finance Minister Nirmala Sitharaman stated that she would consider tax changes on stocks, though she did not confirm whether the government intends to revise capital gains or transaction taxes. The levy was originally introduced in 2018.

Industry executives emphasize that India's tax treatment for foreign portfolio investors is increasingly out of step with global standards. Major economies including the US, the UK, Germany, Japan, and emerging markets such as South Korea, Brazil, China, and Taiwan exempt such inflows from taxation. Edelweiss Financial Services Ltd. Chairman and Managing Director Rashesh Shah noted in an interview that removing the capital gains tax for foreigners could provide a straightforward solution to establish India as a permanent allocation destination.

Beyond equities, fund managers are also seeking tax parity for debt funds. Long-term gains on debt mutual funds are currently taxed at investors' applicable income-tax rates, which industry participants argue acts as a deterrent. Srinivas Jain, joint CEO at SBI Funds Management Ltd., stated that investors require a compelling incentive to allocate to debt and that higher tax rates weaken that motivation.

Additionally, wealth advisors have highlighted the potential for increased capital flows into fixed-income and bond markets if restrictions are eased. Mihir Kapadia, chairman at Sun Global Investments, suggested that encouraging Indian corporates and state-run firms to raise capital through dollar and masala bonds—which are rupee-denominated debt securities sold abroad—could tap into available global capital.

While a recent global sell-off in artificial intelligence stocks and declining oil prices led to more than $3.5 billion in foreign investments over a single week, structural concerns regarding foreign outflows and tax policy remain central to discussions within the financial sector.

"Tax rationalization is a critical consideration for sustaining foreign capital inflows into emerging markets. As global liquidity shifts, aligning our capital gains and debt taxation policies with international standards can significantly enhance India's competitive edge. For the startup and broader business ecosystem, a predictable and investor-friendly tax framework remains essential to ensure steady, long-term institutional participation across both equity and fixed-income assets." — Dr. Shishir Gupta, Founder & CEO, StartupLanes