To ease capital inflows, start with a friendlier tax regime
Indian Express - Opinion · Published 4 November 2026 · Last updated
Amid $51 billion in equity outflows since 2024-25, India faces a policy trade-off between rationalising capital gains taxes to attract global investors and avoiding discrimination against domestic rupee investors.
Key points
- Foreign portfolio investors (FPIs) have pulled out $51 billion from Indian equity markets since 2024-25.
- Rising yields in developed economies, including the 10-year US bond yield hovering around 4.9%, have raised the risk-free rate and drawn global capital away from emerging markets.
- Global capital has disproportionately rotated towards companies across the artificial intelligence (AI) ecosystem, including Nvidia, Google, Samsung, SK Hynix, and TSMC, an area where India currently lacks a significant footprint.
- Souring market sentiment has triggered industry demands to review and lower the long-term capital gains (LTCG) tax regime on equities.
- In June 2026, the Union government introduced tax exemptions on interest income, as well as short-term and long-term capital gains, alongside streamlined investment norms to boost foreign participation in government bonds.
- Finance Minister Nirmala Sitharaman cautioned against viewing tax concessions as the primary driver of equity performance, raising concerns over equity parity by questioning: 'If you pitch for dollar investors, what about rupee investors?'.
- Outward remittances under the Liberalised Remittance Scheme (LRS) crossed $20 billion during the first eight months of 2026.
- Market analysts and reports by Jefferies highlight three potential tax relief mechanisms: an across-the-board cut in LTCG tax rates, targeted tax reductions for foreign funds, or taxing returns purely on dollar-denominated gains to protect foreign funds from dual currency erosion.
- Policy experts caution that proposals seeking to place curbs or restrictions on LRS outward flows are regressive and counterproductive to developing India as a global financial centre.
Background
- 2024-25: Sustained foreign portfolio outflows commence as emerging market assets face valuation re-ratings and rising interest rates in the developed world.
- 2024-2025: Global capital increasingly concentrates in generative AI hardware and software supply chains across the United States, Taiwan, and South Korea.
- June 2026: The Ministry of Finance introduces tax exemptions covering interest income, short-term capital gains, and long-term capital gains to encourage foreign investor entry into Indian sovereign debt securities.
- August 2026: Resident Indian outward remittances under the Reserve Bank of India's Liberalised Remittance Scheme surpass $20 billion within eight months, prompting debates over potential outflow restrictions.
- November 2026: Total cumulative equity withdrawals by foreign portfolio investors cross $51 billion since 2024-25, intensifying calls for structural rationalisation of equity capital gains taxes.
UPSC relevance, Prelims facts and Mains angle for this issue are in the full SWAदेSH note.
Original report: Indian Express - Opinion