Market expert Aditya Shah of Hercules Advisors has joined the growing chorus calling for India to completely abolish long-term capital gains tax on equities for foreign investors, arguing it deters crucial portfolio inflows. Speaking to The Economic Times, Shah contends that removing the tax is the only credible signal to attract foreign capital, which is vital for lowering the cost of capital and restoring India's competitiveness as an investment destination. He emphasized that "If you want foreigners to come and invest in India, you cannot have a taxation format which is much different from any other country around the world." Shah acknowledges that the government is now showing willingness to reconsider its position — partly driven by the sharp depreciation of the rupee, which has itself been worsened by sustained FPI selling. He welcomes this as a positive first step, but cautions that tweaks to the LTCG threshold or holding period will not move the needle - only a clean, unconditional removal for foreign investors will restore India's competitiveness.
Foreign portfolio investors continue to withdraw money from Indian markets, highlighting ongoing concerns about the country's investment climate. According to reports from The Economic Times, market expert Sudip Bandyopadhyay emphasized that while domestic retail participation has helped prevent a sharp market collapse despite sustained FPI selling, this should not lead policymakers into believing foreign investors are no longer important. He stressed that FPIs need to remain in the market and invest in India because we need well-rounded economic growth and a strong capital market. Speaking to ET Now, Bandyopadhyay said India needs to seriously reconsider the structure of securities transaction tax (STT) and long-term capital gains tax (LTCG) if it wants to remain an attractive destination for global capital.
Bandyopadhyay highlighted that many global investors feel structurally disadvantaged while investing in India because of the current tax framework. As reported by The Economic Times, he specifically pointed out that long-term capital gains tax and short-term capital gains tax are major irritants for foreign investors, with the presence of securities transaction tax (STT) adding another layer of cost to market participation. He explained that when STT was initially introduced, it was introduced as a substitute for LTCG tax, but both taxes have remained in place simultaneously over time, something he described as unfair to investors. According to Bandyopadhyay, most international markets do not impose taxes of this nature at the same scale, making India comparatively less competitive. Shah of Hercules Advisors agrees, noting that India's long-term capital gains tax on equities, reintroduced in 2018 after a decade-long absence, has quietly become one of the most contentious policy levers affecting foreign portfolio flows.
According to Bandyopadhyay's analysis reported by The Economic Times, foreign investors typically make investment decisions based on long-term assumptions and financial projections, but sudden changes in taxation through annual budgets create uncertainty and reduce confidence in policy stability. He stressed that one consistent kind of grievance global investors have is that why do you guys keep changing the law every now and then. You have a structure and keep it constant. Speaking to ET Now, he noted that foreign investors would be willing to accept STT if LTCG was removed, indicating that the primary concern is not liquidity impact but the dual taxation structure. Shah of Hercules Advisors echoes this sentiment, emphasizing that foreign investors typically make investment decisions based on long-term assumptions and financial projections, making policy stability crucial for attracting sustained capital flows.
On the question of potential revenue losses from cutting or removing these taxes, Bandyopadhyay argued that the actual impact may be limited in the present market environment. As reported by The Economic Times, he noted that many investors are currently sitting on losses after two years of lacklustre market performance, meaning meaningful LTCG collections are unlikely anyway. He described STT collections as minuscule and rounding off figures in the government's budget, while questioning how much revenue the government realistically expects to earn through capital gains taxes under current market conditions. Speaking to ET Now, he further added that STT collections, while steady, form only a very small part of the government's overall budget revenues, making them rounding off figures in the government's budget.
The discussion comes at a crucial time for Indian markets as policymakers balance revenue generation with the need to attract stable foreign investment flows. According to The Economic Times, while retail participation has remained resilient, market participants continue to believe that long-term foreign capital remains essential for deeper liquidity, better price discovery, and sustained economic growth. For many investors, the larger issue may not just be taxation itself, but the predictability of policy, with stability and consistency often mattering as much as the tax rate when global funds decide where to allocate capital. As Bandyopadhyay noted, first people have to make money in the market, then only the capital gains tax comes in, emphasizing the importance of market performance over tax structure. Shah of Hercules Advisors concludes that the government can no longer afford to sit on the fence - complete removal of LTCG for foreign investors represents the only viable solution to restore India's competitiveness and attract the foreign capital essential for long-term economic growth.
