Capital has choices: Is India’s equity tax regime eroding its global competitiveness?

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India’s growth story remains compelling, but attracting and retaining foreign capital requires more than strong economic fundamentals. A competitive tax regime, lower transaction costs and predictable policies are equally important.

Capital is mobile, but investor confidence is not built on growth prospects alone. When global investors decide where to deploy their money, they weigh a range of factors: corporate earnings, valuations, currency movements, market liquidity, transaction costs, taxation and policy predictability. A country may offer an attractive long-term growth story, but if the returns it delivers after taxes and costs are less competitive than those available elsewhere, capital will inevitably look for alternatives.

This is an important consideration for India today. The country remains one of the world’s most promising long-term investment destinations, supported by its economic scale, domestic consumption and structural growth opportunities. Yet foreign portfolio investors (FPIs) have withdrawn Rs 4.74 lakh crore from Indian equities since January 2025, exceeding the Rs 3.86 lakh crore invested over the nine years from 2016 to 2024.

Source: NSDL

These outflows cannot be attributed to taxation alone. Global interest rates, geopolitical uncertainty, relative market valuations, corporate earnings and rupee depreciation all influence foreign investment decisions. However, taxation is one of the few factors directly within the government’s policy control. It therefore deserves closer scrutiny.

The central question is not whether India should tax capital gains, but whether its equity tax regime remains competitive in a world where investors can choose between multiple markets.

The post-tax return matters

For an international investor, the headline return generated by an equity market is only part of the investment equation. What ultimately matters is the return realised after taxes, transaction costs and currency movements.

India currently taxes long-term capital gains on listed equities at 12.5 percent on gains exceeding Rs 1.25 lakh and short-term capital gains at 20 percent, subject to applicable surcharge, cess and treaty provisions. Investors also pay securities transaction tax (STT), including a 0.1 percent levy on both purchases and sales of delivery-based equity trades.

Individually, these taxes may appear manageable. Collectively, however, they influence the economics of investing, particularly for institutions that allocate capital across several markets and evaluate opportunities on a relative, risk-adjusted basis.

How listed-share gains are taxed for foreign portfolio investors

The comparison with competing investment destinations is instructive. Markets such as Hong Kong, Singapore and Taiwan generally offer favourable capital gains tax treatment for foreign portfolio investors in listed equities, subject to specific conditions. The United States and the United Kingdom also have rules under which certain foreign investors may be exempt from domestic capital gains tax on listed shares, depending on their circumstances and the applicable legal framework. Japan, meanwhile, follows its own tax rules and exemptions.

Sources: PwC Worldwide Tax Summaries (2026 reviews); Deloitte International Tax Highlights 2026; HM Revenue & Customs; Hong Kong Inland Revenue Department; IRAS (Singapore); HKEX Stock Connect Information Book (July 2026); Finance (No. 2) Act 2024 and Finance Act 2026 (India). India's treaties with Mauritius, Singapore and Cyprus have allowed India to tax gains on shares acquired from 1 April 2017. China's exemption is formally temporary. Korea's exemption applies to holdings below 25 percent; Japan taxes only specified substantial or real-estate holdings.

The point is not that these markets have no taxes or regulatory costs. Rather, their treatment of foreign equity investment can differ materially from India’s.

India’s combination of capital gains taxation and transaction levies therefore warrants a competitiveness assessment. When an investor compares two markets with similar expected returns, the market offering a better post-tax outcome has an inherent advantage. Even a relatively small difference can influence portfolio allocation when investment decisions involve billions of dollars.

A gradual shift in the tax landscape

India’s equity taxation framework has evolved considerably over the past two decades. Long-term capital gains on listed equities were exempt between 2004 and 2018. The exemption was withdrawn in 2018, and the applicable long-term capital gains tax rate has subsequently risen to 12.5 percent. The short-term capital gains tax rate has also increased, from 10 percent in 2004 to 20 percent today.

Transaction taxes have added another dimension to the cost of market participation. STT collections increased from approximately Rs 7,350 crore in FY2015-16 to Rs 52,197 crore in FY2024-25, a roughly sevenfold rise. Higher trading activity has contributed significantly to this increase, so the growth in collections should not be interpreted as the consequence of higher tax rates alone.

Nevertheless, the broader trend raises a legitimate policy question: has the cumulative tax burden on equity investing reached a point where its impact on market competitiveness deserves greater attention?

There is also an interesting contrast in the government’s approach to different segments of the capital market. From April 2026, specified interest income and capital gains earned by FPIs from government securities were exempted from income tax under the applicable provisions. Comparable relief has not been extended to equity investments.

Debt and equity markets serve different purposes, and their tax treatment need not be identical. However, the policy distinction highlights an opportunity to examine whether India’s approach to attracting foreign investment is sufficiently balanced across asset classes.

If attracting overseas capital is a strategic priority, equity taxation should be evaluated with the same emphasis on international competitiveness, while recognising the different economic and fiscal considerations involved.

The fiscal argument is real, but incomplete

Any proposal to reduce equity taxation must confront a legitimate concern: government revenue.

In FY2024-25, STT and long-term capital gains tax on equities together generated approximately Rs 1.81 lakh crore. This is a substantial contribution to public finances, and reducing these levies would involve a fiscal trade-off. There is no guarantee that lower tax rates would generate enough additional investment or trading activity to offset the immediate revenue loss.

Yet evaluating tax policy solely through the revenue collected in a given year risks overlooking its wider economic effects.

Capital markets are not merely sources of tax revenue. They help channel household savings into productive enterprises, facilitate capital formation, support price discovery and provide companies with access to financing. Deeper markets can also improve liquidity and broaden the investor base, creating benefits that extend beyond individual market participants.

A tax regime that maximises near-term collections but discourages investment at the margin may not necessarily maximise long-term economic value. Conversely, a reduction in tax rates that produces little additional investment would simply weaken public finances without delivering the intended benefits.

The relevant question, therefore, is one of calibration: what tax structure can sustain a reasonable level of revenue while keeping India attractive to both domestic and international investors?

The answer requires evidence rather than assumptions. Policymakers should examine how changes in capital gains taxation and STT affect trading volumes, holding periods, market liquidity, foreign portfolio allocations and tax collections over time. The objective should be to understand the relationship between tax rates and economic activity, rather than treating every increase in collections as an unqualified policy success.

Currency risk makes the equation more complex

For foreign investors, India’s tax burden cannot be assessed in isolation from currency risk.

A dollar-based investor may earn a positive return in rupee terms and still realise a substantially lower return in dollars if the rupee depreciates during the investment period. Taxes and transaction costs further reduce the amount ultimately available to the investor.

This does not mean that currency depreciation or taxation alone determines capital flows. Investors also assess earnings growth, corporate governance, market depth, valuations and the availability of alternative opportunities. Nor does a favourable tax regime guarantee that investors will overlook expensive valuations or deteriorating fundamentals.

But these factors interact. When expected returns are under pressure from currency movements or elevated valuations, additional costs can become more consequential in the allocation decision.

This is why tax competitiveness matters even when it is not the principal driver of foreign investment flows. A country cannot control every variable that shapes global capital allocation, but it can avoid imposing unnecessary disadvantages on itself.

A calibrated reform agenda

India does not need to eliminate capital gains taxation to strengthen its position in global markets. Nor should it pursue tax cuts merely to reverse a temporary phase of foreign investor selling.

What it needs is a systematic review of whether its equity tax framework strikes the right balance between fiscal requirements and investment competitiveness.

Three considerations should guide such a review.

First, policymakers could evaluate a calibrated reduction in the tax burden on long-term equity investments. A measured approach would help determine whether more favourable treatment of patient capital can encourage longer holding periods and strengthen the investor base without creating disproportionate fiscal costs.

Second, the government could examine the cumulative impact of STT on equity transactions. Unlike a tax levied only on realised gains, STT is linked to the transaction itself and can affect trading economics irrespective of whether an investor ultimately makes a profit. Its impact on liquidity, market-making and the cost of portfolio rebalancing deserves particular attention. Any reform should also account for the potential revenue implications and the risk of encouraging excessive speculative activity.

Third, tax policy must be predictable. International investors allocate capital across jurisdictions over long investment horizons. Frequent changes in tax rates, eligibility conditions or the interpretation of rules can complicate investment planning. A transparent and stable framework may be as important as the headline rate itself.

These measures would not guarantee an immediate reversal of FPI outflows. Global capital flows will continue to respond to interest rates, valuations, currency expectations and geopolitical developments. But a more competitive tax structure could improve India’s relative appeal when investors reassess their allocations.

Competing for capital beyond the growth story

India’s economic prospects remain compelling, but growth potential is not an automatic guarantee of capital inflows. Investors must be able to translate that growth into attractive, risk-adjusted returns after accounting for taxes, costs and currency movements.

The policy challenge is to recognise that capital markets operate in a competitive global environment. India must balance the government’s legitimate need for revenue against the long-term benefits of deeper markets, stronger investment participation and a broader pool of domestic and international capital.

A thoughtful reassessment of equity taxation would not amount to conceding that foreign investors should dictate domestic policy. It would reflect a more fundamental recognition that tax policy influences the cost of capital, and that the cost of capital has consequences for investment, valuations and economic growth.

Ultimately, the objective should not be to make India the lowest-tax market in the world. It should be to ensure that India’s tax regime does not unnecessarily weaken the investment proposition created by its economic fundamentals.

Capital has choices. If India wants global investors not merely to discover its growth story but to remain invested in it, competitiveness must extend beyond the promise of future growth to the returns investors can reasonably expect to retain. That is where a more considered approach to equity taxation can make a meaningful difference.