Recalibration of tax regime may attract larger share of global capital

The article was first published in The Financial Express dated January 21 2026. Please click here to read the article.

The Indian Capital market has been at the crossroads in recent times. On one hand, we have the red-hot IPO market with record subscriptions and strong listings. In contrast, the secondary market has seen muted action and interest from the foreign investors in last eighteen months or so.

It will be worthwhile to look at the investment environment for Foreign Portfolio Investors (FPIs) in the recent past such as India’s GDP growth has still been strong, clocking 8.2 per cent in Q2 of current fiscal. Last few quarters average earnings growth has been muted – evidenced by single digit growth rate; tariffs levied on Indian exports in the US by the Trump administration (among the highest in the world); rupee has seen continued depreciation against most major currencies in the recent past.

This has resulted in lower returns for the investors (post conversion); companies continue to be richly valued – as compared to foreign markets. the absence of new age companies in AI, chips, cloud computing space – a space which has garnered maximum investments globally.

Taxation on gains

Another critical factor influencing FPI sentiment is the taxation of capital gains on listed equities. Over the past decade and a half, the tax burden has increased multiple times, primarily as a revenue-generation measure.

Further, securities transaction tax (STT) is levied at the rate of 0.1 per cent on purchase and sale of listed equity shares. STT was first introduced in 2004/2005. There was no tax levied then, on gains which qualified as long-term capital gains whereas short-term capitals gains were taxed at the rate of 10 per cent. Also, STT collections have exploded in the past few years – from around Rs 16,000 crore in FY 2020-21 to estimated Rs 75,000 crore for the current fiscal year.

Investors see the prevailing tax rates on gains and the STT levy as a double whammy. The consolidation in Sensex numbers above clearly show the impact post the increased levy to July 2024. The July 2024 increase which became applicable from immediate effect, also resulted in operational and reporting challenges for stakeholders since changes to systems/processes require minimum lead time.

The countries which are enjoying maximum capital inflows do not impose capital gains tax (CGT) on listed equities earned by foreign investors on their portfolio investments. This includes the US, Singapore, Japan, South Korea and Taiwan.

Considering the above, it is no surprise that last year saw correction in the secondary market, especially in mid-caps and small caps. FPIs selling for calendar year 2025 was a record $18 billion.

This was on the back of 2024 which was a flattish year from a FPI investment standpoint. Had it not been for the super strong domestic SIP and institution participation, the market would have improved even more.

With the Union Budget approaching, there is a compelling opportunity to enhance India’s competitiveness as an investment destination. Even if a complete exemption on equity gains is unlikely, the government could consider calibrated relief measures:

Exemption from capital gains where the holding period is three years or above. While this will result in an additional as far as holding period is concerned, it will provide necessary incentive and reward for long-term capital

Roll back of the mid-year July 2024 tax increases which took everyone by surprise. This will result in reduction in long-term rate and short-term rate to 10 per cent and 15 per cent, respectively

Overhaul of STT – either complete removal or rationalisation. This will help in reducing the transaction cost as well as reducing the overall tax cost

Parity on surcharge rates

The surcharge rates applicable on FPIs warrants simplification. Currently, a particular FPI is subject to different surcharge rates depending upon the status, income slab and the nature of income. The different surcharge tax rates result in avoidable complexities from a computation standpoint. The surcharge rates for non-corporates may be simplified in the forthcoming budget by removing the disparity across income streams as well as reducing the rates to those applicable for corporates.

Conclusion:

Investment decisions are shaped by multiple factors, but a stable, predictable, and competitive tax framework remains fundamental. If India aims to attract a larger share of global capital, especially from FPIs, a thoughtful recalibration of its tax regime would go a long way.