Inside India newsletter: India weighs a tax cut to win over foreign investors. Will it work?

India is considering scrapping the long-term capital gains tax, or LTCG tax, on foreign portfolio investors. The proposal comes as foreign ownership of Indian stocks has fallen to an all-time low of 14%. Supporters believe removing the tax could improve sentiment and make Indian equities more attractive relative to other emerging markets.

The Securities and Exchange Board of India urged the government to remove the tax, while the PHD Chamber of Commerce and Industry also called for abolition. The chamber argued that the tax was raised in 2024, when markets were near record highs. Finance Minister Nirmala Sitharaman said she would consider reviewing it.

A tax cut could help at the margin by aligning India with competing markets. However, experts warn it may not restore foreign investment by itself. Investors are also weighing expensive valuations, weaker earnings expectations, geopolitical tensions, currency weakness and higher energy prices.

Long-term capital gains tax, or LTCG tax, is a charge on profits made when an investment held for a longer period is sold. The article discusses this tax as it applies to foreign portfolio investors, who buy Indian shares without directly running Indian businesses. Their gains from Indian equities can therefore face the country’s long-term capital gains rules.

India increased the tax in 2024, according to the PHD Chamber of Commerce and Industry. The group said the increase came when the stock market was near record highs. It now wants the government to abolish the charge, arguing that market conditions have changed. India’s capital market regulator has also urged the government to scrap it.

The tax is one factor in investment decisions, not the only one. Experts say removing it could put India on a more equal footing with other emerging markets. They also say returns, valuations and broader risks will continue to matter.

Foreign participation in Indian equities has fallen sharply. Foreign holdings now stand at 14%, their lowest level ever, according to a Nomura report. This decline shows that India has lost some of the foreign investor enthusiasm it enjoyed three years ago, when it was celebrated as the best-performing emerging market.

The money leaving the market is substantial. Foreign investors withdrew a net $18.9 billion in 2025 and more than $30 billion so far this year. In September 2024, they invested about 570 billion rupees, or $6 billion, in Indian equities. One month later, they pulled out 940 billion rupees to pursue cheaper Chinese stocks.

The article identifies March as the month of a record exit. It also says India’s Nifty 50 has lost nearly 9% this year. The scale of the outflows is increasing pressure on officials to review the LTCG tax and address deeper investment concerns.

A lower or eliminated LTCG tax could make Indian equities more appealing to foreign investors. It would reduce a cost of investing and bring India’s tax regime closer to those of competing emerging markets. Nomura said such a cut, alongside lower global bond yields and support for the rupee, would lend support to Indian markets.

The likely mechanism is improved relative returns. A tax cut leaves investors with more of their investment gains, which can make Indian shares more competitive when other factors are similar. It could therefore improve sentiment, support stock prices and reduce pressure from foreign selling. But the article does not present this as guaranteed.

Experts say the tax change alone will not trigger a major reallocation. India still faces expensive valuations, disappointing earnings growth, geopolitical tensions, higher energy prices, currency weakness and technological uncertainty. Several catalysts may be needed to reverse the capital outflows.

Foreign investors compare expected returns across markets. India’s tax rate did not change between September and October 2024, but investors’ view of the relative opportunity did. When another market offers cheaper shares or stronger expected gains, capital can move there even without a change in tax policy.

Amit Bhartia gave a clear example. Foreign investors put about 570 billion rupees, or $6 billion, into Indian equities in September 2024. One month later, they withdrew 940 billion rupees and chased cheaper Chinese stocks. Bhartia said the key difference was perceived relative return, not the tax rate.

This explains why removing India’s LTCG tax may have limited power. Investors are also comparing valuations and earnings prospects. India trades at a forward price-to-earnings ratio of 18.6 times, versus 16.8 times for Taiwan and 3.9 times for Korea. India’s expected earnings growth is also slower.

Valuations show how much investors pay for expected company earnings. When prices are high but earnings growth looks weak, future returns may appear less attractive. That matters more than a tax break because investors compare the total opportunity across countries, including both possible gains and risks.

India’s rolling 12-month forward price-to-earnings ratio is 18.6 times. Taiwan’s is 16.8 times, while Korea’s is just 3.9 times. Bernstein also expects emerging markets to deliver a 45% improvement in earnings on average, compared with only 11% for India. These figures make competing markets look more appealing.

A tax reduction could improve India’s after-tax returns, but it would not automatically make shares cheaper or earnings stronger. Experts therefore say the fundamental trade-off remains unchanged. India may need stronger earnings, more reasonable valuations and reduced risks, alongside tax relief, to attract substantial foreign capital.

Foreign portfolio investors allocate capital by comparing expected returns across countries. They assess share prices, earnings growth and the risks surrounding each market. Tax is part of that calculation, but investors tend to buy the opportunity with the best overall potential rather than simply the lowest tax rate.

India’s recent experience shows the mechanism. Investors moved from Indian equities toward cheaper Chinese stocks even though India’s tax rate did not change. India’s expensive valuations and slower expected earnings growth weakened its relative appeal. Taiwan and Korea also benefited from strong artificial-intelligence companies, according to the article.

Risk can change these choices quickly. India currently faces strained ties with the United States, higher energy prices, a depreciating currency and uncertainty about artificial intelligence. Geopolitical and technological uncertainty is also weighing on long-term growth expectations. A tax cut, lower bond yields and a stronger rupee could help, but Bernstein says multiple catalysts are needed.