'Will consider all': Sitharaman on FPIs' concerns over equity taxation

Foreign portfolio investors are concerned that India’s capital gains tax structure may reduce the attractiveness of its equity market. Sitharaman said taxation is only one factor in investment decisions, but acknowledged the sensitivity and anxiety among retail investors and equity-market participants. Her response leaves open the possibility of reviewing the concerns before the Budget.

She pointed to 2023–24 as a useful comparison. India’s tax structure was similar then, yet the country recorded its highest foreign investment inflows. This suggests that taxes alone do not determine whether foreign investors buy Indian shares. Market conditions and investor confidence also matter.

The situation has since changed. Foreign institutional investors recorded greater net outflows before signs of a recovery. Sitharaman said investors were beginning to return, but India still needs capital to sustain growth above 7%. Her comments indicate that the government will weigh investor concerns while considering possible changes to the tax regime.

Foreign portfolio investors, or FPIs, are investors based outside a country who buy its financial assets without usually taking direct control of the businesses involved. They can invest in publicly traded shares, bonds, and similar market instruments. Their money connects domestic companies and markets with international savings.

For example, an overseas fund might buy shares listed in India because it expects Indian companies or the wider economy to perform well. It could also purchase Indian bonds to earn interest. The basic mechanism is cross-border portfolio investment: money enters the market, buys securities, and can later be withdrawn or reinvested.

FPIs compare expected returns with risks, taxes, currency movements, market conditions, and economic prospects. This is why taxation matters, but is not the only influence on investment decisions. The article reports that foreign institutional investor outflows from India increased before beginning to recover, showing how changing conditions can affect capital flows.

Long-term capital gains tax is a tax on profit earned from selling an investment after holding it for a legally defined long period. The gain is generally the sale value minus the investment’s cost, subject to the rules in force. For equities, the tax affects the amount an investor keeps after selling shares or equity-linked investments.

For example, if an investor buys equity for Rs 100 and later sells it for Rs 150, the Rs 50 increase is a capital gain before applicable taxes and other costs. A long-term classification can depend on the country’s holding-period rules. The tax is usually considered when the investment is sold, not simply because its market price rises.

The article focuses on demands to reduce or remove LTCG tax on equities. SEBI has reportedly recommended scrapping it for foreign investors and offering relief when domestic mutual fund investors switch schemes. Any change would depend on the government’s Budget decision and final rules.

India’s foreign investment inflows were especially strong in 2023–24. Sitharaman described that year as the period when the country recorded its highest foreign investment inflows. This makes 2023–24 the article’s benchmark for understanding how investors responded to India at that time.

The important comparison is that India’s tax structure was similar in 2023–24 to the structure discussed now. Despite that, foreign money entered the country at its highest recorded level, according to the finance minister. This suggests that factors beyond taxation helped shape investment flows during that period.

The article does not provide the exact inflow amount or a year-by-year comparison with previous years. It says conditions later changed, with larger net foreign institutional investor outflows before signs of recovery. Sitharaman therefore acknowledged that today’s concerns are louder even though the tax structure was broadly similar to that earlier period.

LTCG taxation affects the after-tax return from selling an investment. If the government reduces the tax, investors may keep more of their profits. If it raises the tax, their net returns may fall. Those differences can influence whether foreign and domestic investors buy, hold, or sell equity investments.

For example, a foreign fund comparing Indian shares with another market may find India more attractive if a tax cut improves its expected return. More buying could increase capital flowing into India and support trading activity. A tax increase could have the opposite effect. However, these are possible effects, not outcomes confirmed in the article.

The current reality is more complex. Sitharaman said taxation is only one investment factor, while market conditions have changed and foreign institutional outflows have risen. SEBI has reportedly proposed tax relief. The government may consider these concerns as it prepares the Budget, but no final change is announced.

Foreign investors weigh the overall opportunity, not just the tax bill. They consider expected economic growth, company performance, market valuations, political and policy stability, currency movements, and the ease of entering or leaving investments. These factors help determine whether potential returns justify the risks.

For example, an investor may accept an existing tax structure if India’s growth outlook and market prospects are strong. The reverse can also happen: even a tax reduction may not attract money if markets are weak or risks appear high. The decision reflects the combined effect of returns, uncertainty, liquidity, and investment choices.

The article directly supports this broader view. Sitharaman said taxation was only one of several factors. She also referred to changed market conditions, rising foreign institutional outflows, and the need to deepen and widen India’s bond market. She acknowledged that equity investors were seeking greater support, while noting that foreign flows had begun to recover.

Equity and bond markets connect organisations that need money with investors who have savings to deploy. Companies can raise equity capital by selling ownership stakes, or issue bonds by borrowing from investors. Governments can also issue bonds to finance public spending and development. These markets spread funding beyond banks or government revenues.

For example, a company can sell shares to raise money for expansion without taking on a fixed repayment obligation. It can issue bonds when it wants to borrow for a defined period and repay investors with interest. Investors receive a potential return, while the organisation receives capital for productive or public purposes.

The article links this financing role to India’s growth target. Sitharaman said the country needs capital to sustain growth of over 7%. She also highlighted efforts to deepen and widen the bond market, while recognising that investors wanted greater support for equity markets. Stronger markets can therefore broaden funding options, though the article does not quantify their effect.