Foreign Funds Propose Tax Exemption for Indian Shares Held for More Than 3 Years
Key Facts
Large foreign funds have proposed creating a third tax category that would exempt investments in Indian equities held for more than 3 years from capital gains tax, according to a report published by Moneycontrol on 30 October 2026. The proposal seeks to add a “very long-term” category to the existing system, retaining the two current categories while giving investors who hold shares for longer periods more favorable tax treatment. This does not mean that the Securities and Exchange Board of India recommended abolishing the tax; the proposal came from foreign investors, while discussions between them, the government and the regulator concern restructuring the tax. The report said the Finance Ministry had recently held discussions with senior officials about the proposal. The government and the regulator also held extensive discussions with representatives of foreign funds, including pension and retail funds, during the two months before the report was published.
The proposal comes as pressure from foreign capital outflows from Indian equities mounts. According to filing data cited by Moneycontrol, foreign investors sold more than 4.6 trillion rupees’ worth of Indian shares from the start of 2025 through 30 October 2026. Separately, data from Central Depository Services showed net outflows from equities of 3.1 trillion rupees in 2026 through 26 October. That figure exceeded the 1.7 trillion rupees withdrawn by investors during all of 2025. These flows have put the cost of investing in Indian equities into the debate over ways to attract foreign capital, as investors seek preferential treatment for longer-term investments.
Current tax rules, according to the 30 October report, classify gains on listed shares held for up to 12 months as short-term capital gains, subject to a tax rate of 20%. Shares held for more than 12 months fall into the long-term gains category and are subject to a tax rate of 12.5%, subject to applicable conditions and exceptions. Investors propose retaining these two categories and adding a third, more favorable bracket for those holding shares for much longer. This tiered approach explains the core of their demand: linking the holding period to lower tax treatment, rather than abolishing the tax for all investors. In a government response published in July, the government said the 12.5% rate on long-term gains was the same for domestic investors and foreign portfolio investors. It added at the time that no proposal to abolish long-term capital gains tax on equities was under consideration.
The discussion over the tax on equities differs from an earlier exemption covering certain government securities. The government granted foreign investors a tax exemption on income, interest and capital gains from those securities, effective from 1 April 2026. Business Standard reported that markets and the rupee exchange rate changed little after the exemption was announced. The current proposal concerns Indian equities and the length of time they are held, and the available evidence does not indicate that it has been approved. In remarks cited by the report in October, Finance Minister Nirmala Sitharaman said she would listen carefully to discussions concerning long-term capital gains tax and the securities transaction tax on equities. The minister did not announce that the government was considering abolishing capital gains tax before the budget.
Industrial production figures provide economic context for India as officials discuss possible tax changes. The industrial production index grew 6.7% year on year in September 2026, compared with a quick estimate of 8.0% in August. Manufacturing grew 7.6% in September, while electricity and gas production rose 11.2%. The Statistics Ministry published these figures on 28 October, and they relate to September, not the date of publication. Industrial production data for October are scheduled to be released on 30 November 2026. The next release provides a near-term point for tracking industrial activity, while a decision on restructuring the equity tax remains under discussion.
A government official, according to Moneycontrol, said a decision on restructuring the long-term capital gains tax was expected soon and that the government was reviewing the rate against those applied in major economies. The report quoted the official as saying: “A decision on the restructuring is expected soon,” adding that the government was “reviewing the long-term capital gains tax rate against what is applied in major economies.” On 13 October, Sitharaman said she would listen to discussions on long-term capital gains tax and the securities transaction tax, while domestic equities recorded their biggest daily gains in 4 months that day, according to Business Standard. Business Standard estimated that cutting long-term capital gains tax could help restore foreign inflows and support the rupee, while the impact of lower revenue could limit the scope for any relief. The report said foreign investors withdrew 21 billion dollars from Indian equities in fiscal year 2026, and a further 16.5 billion dollars during the current fiscal year through 23 October. Jefferies outlined 3 options: a general cut to long-term and short-term capital gains taxes, a cut specifically for foreign investors, or calculating their gains in U.S. dollars.