Potential LTCG tax cut could revive FIIs’ India bet, says Jefferies: Which stocks may benefit most?

Equity long-term capital gains, or LTCG, tax applies to profits made when investors sell listed shares after holding them for the qualifying long-term period. It matters because the tax changes the return investors keep and can influence where global money is invested. India’s current listed-equity LTCG rate is 12.5%.

The government is considering several routes. It could cut both LTCG and short-term capital gains rates across the board. It could offer a smaller rate specifically to foreign portfolio investors. Or it could let FPIs calculate gains in dollar terms, creating an indexation-like benefit against currency changes.

The debate reflects a trade-off. A cut could improve India’s competitiveness and attract foreign flows, but it would reduce government revenue. Equity LTCG raised Rs 1.3 lakh crore in FY25, while LTCG and STT together represented 8% of direct tax collections and 5% of total gross tax revenue.

Jefferies expects renewed foreign investment to favor sectors that have already suffered heavy selling and contain large, liquid companies. Banks are its key preference. It also favors Energy, represented by Reliance Industries, along with utilities and real estate. These areas could attract money quickly if foreign investors rebuild India positions.

The named financial beneficiaries include HDFC Bank, ICICI Bank, Axis Bank, State Bank of India, Kotak Mahindra Bank, Bajaj Finance, and Shriram Finance. Reliance Industries is the brokerage’s energy choice. Its wider list includes Bharti Airtel, Infosys, Larsen & Toubro, Tata Consultancy Services, Power Grid Corp., NTPC, Titan, Maruti Suzuki, Apollo Hospitals, Adani Power, and Adani Ports.

The preference is not limited to the most oversold sectors. Jefferies prefers largecaps over midcaps. Largecaps outperformed by 5 percentage points in 2026 and traded at a 23% valuation discount to their 10-year average discount of 20%.

India has faced unusually large foreign selling. Jefferies estimates that equity-market-related foreign exits reached $110 billion over the past two years. The figure includes foreign portfolio investors, foreign promoters, and private equity investors, showing that the pressure extends beyond daily stock-market trading.

The recent pace is also substantial. FIIs recorded net outflows of $21 billion in fiscal 2026. They then withdrew another $16.5 billion in fiscal 2027 through October 23. These flows have left foreign investors’ India positioning described as “light,” creating potential room for a recovery if taxation becomes more favorable.

Global emerging-market funds are cautious too. India was underweight by 0.3 percentage points among 70 large funds managing $380 billion. That compares with a decade-average overweight of 2.2 percentage points. As many as 64% of these funds were underweight India against their benchmarks.

An equity LTCG cut could make Indian shares more attractive to foreign investors by improving their after-tax returns. If more foreign money returns, demand for Indian stocks could rise. That may support share prices, especially in large companies and sectors already hit by heavy overseas selling.

The article gives a recent comparison from the bond market. Tax relief for foreign investors in Indian government securities was followed by $9 billion of debt FPI inflows during June and July 2026. Jefferies believes similar equity relief could improve foreign portfolio investor sentiment and flows. More demand for Indian assets could also support the INR.

The outcome is not guaranteed. The government must weigh competitiveness against lost revenue and broader tax-policy goals. India’s foreign positioning is already light, so there is room for a flow revival. Jefferies expects the earliest benefits to reach large financial stocks, Reliance Industries, utilities, and real estate.

These sectors may benefit first because foreign investors have already sold them heavily. Financials recorded the largest foreign outflows since October 2024, at $16 billion. Information technology and consumer staples each saw $10 billion of outflows. A reversal could therefore begin in the areas where foreign positioning has weakened most.

Large companies also offer a direct way for global funds to increase exposure. Jefferies names HDFC Bank, ICICI Bank, Axis Bank, State Bank of India, Kotak Mahindra Bank, Bajaj Finance, and Shriram Finance among possible beneficiaries. It also favors Reliance Industries, utilities, and real estate. These stocks are easier to use for large portfolio allocations than smaller companies.

Jefferies prefers largecaps over midcaps. Largecaps outperformed by 5 percentage points in 2026 and traded at a 23% valuation discount to their 10-year average discount of 20%. That combination may make them more appealing if foreign flows return, before money spreads to smaller stocks.

India’s listed-equity tax regime has moved from abolition toward higher taxation. LTCG tax was abolished in 2004. At the same time, short-term capital gains tax was set at 10%, and the Securities Transaction Tax, or STT, was introduced. This created a different tax structure for longer and shorter holding periods.

LTCG returned in 2018 at a 10% rate. The government later raised the rates in 2024. LTCG increased to 12.5%, while short-term capital gains tax rose to 20%. The article presents this history as part of the current debate over whether capital-market levies have become less competitive.

The government is now seeking views from investors, market participants, and tax experts on LTCG and STT. Any reduction would have a fiscal cost. LTCG collections were Rs 1.3 lakh crore in FY25, while STT collections were running at an annualised pace of about Rs 85,000 crore in FY27.

Foreign portfolio investment is money from overseas investors placed in a country’s financial assets, such as shares or bonds. Buying can increase demand and support stock prices. Selling can pressure markets. These flows also affect the exchange rate because investors buy or sell the local currency while entering or leaving assets. The article links renewed flows with support for Indian equities and the INR.

Foreign investment can also generate government revenue through taxes on gains and transactions. In India, equity LTCG collections reached Rs 1.3 lakh crore in FY25, while STT collections were running at about Rs 85,000 crore annually in FY27. Governments may tax investments to raise revenue and balance market incentives with fiscal needs.

India’s current debate shows the trade-off. A tax cut could improve FPI sentiment and flows, as debt tax relief preceded $9 billion of inflows in June and July 2026. But relief could reduce revenue, so the government must weigh competitiveness against fiscal impact.