SEBI recommends removing 12.5% LTCG tax for foreign investors in private proposal

SEBI has recommended that the government remove the 12.5% long-term capital gains tax on foreign investors, according to two people with direct knowledge of the private pre-budget representations. The recommendations were submitted months before the annual budget in February and are non-binding, with the government yet to make the final decision. SEBI has also proposed tax relief for domestic mutual-fund investors switching holdings that have been kept for more than a year between schemes.

SEBI proposal covers the 12.5% foreign-investor LTCG tax

SEBI recommended removing the long-term capital gains tax imposed on foreign investors, the two people with direct knowledge of the recommendations said. The current rate is 12.5% for securities held for more than one year.

The tax structure also includes a 20% short-term capital gains rate. Foreign investors pay securities transaction taxes on trades and withholding taxes on dividends, according to the same people.

Mutual-fund switches after one year included in the proposal

SEBI proposed that moving from one domestic mutual-fund scheme to another should not be treated as a taxable sale when the units have been held for more than one year, the two people said.

The domestic measure was intended to encourage investors to remain invested in domestic mutual funds, they said.

Meetings with foreign investors preceded the private representations

The recommendations followed numerous meetings between SEBI and foreign investors over the previous two years, during which foreign investors continued selling Indian stocks, according to the two people.

Investors repeatedly raised the need to change how India taxes them during those discussions, the people said. One person with direct knowledge said the proposals were intended to reduce the upfront tax burden on foreign investors.

Government decision remains pending

The recommendations formed part of private pre-budget representations made months before the annual budget in February, the two people said.

They are not binding, and the final decision rests with the government, according to the people with direct knowledge of the recommendations.