India weighs scrapping foreign investor tax as outflows hit records

India's Finance Minister Nirmala Sitharaman acknowledged the foreign capital exit on Monday and said she would consider calls to review the long-term capital gains tax, according to local media reports. The opening follows Reuters reporting that India's capital market regulator has urged the government to scrap the LTCG tax for foreign portfolio investors. The PHD Chamber of Commerce and Industry, one of the country's oldest industry bodies, made the same appeal last week.

The urgency is easy to see. Foreign holdings of Indian stocks have dropped to an all-time low of 14%, per a Nomura report published Monday. Overseas investors have pulled more than $30 billion out so far this year, after net redemptions of $18.9 billion in 2025. The benchmark Nifty 50 has lost nearly 9% this year, and India ranked as the third-worst performing market between January and October, trailing only Indonesia and Turkey.

The tax itself was raised in 2024, when stocks sat near record highs, and PHD Chamber argues market conditions have changed enough to justify a rethink. Scrapping it would put India on par with several Asian markets. But experts say that's only part of the puzzle. Amit Bhartia, portfolio manager at Singapore-based Delorean Partners, put it bluntly: allocators buy expected returns, not tax breaks.

Bhartia points to a telling two-month stretch. Foreign investors poured roughly 570 billion rupees, about $6 billion, into Indian equities in September 2024, then yanked 940 billion rupees a month later to chase cheaper Chinese stocks. The tax rate never moved between those months, he noted, but the perceived relative return did. October 2024's flood of exits stood as the worst single month until the record outflow in March this year.

Bernstein said Monday that India now has to fight for capital in a competition it once took for granted, arguing multiple catalysts are needed to reverse the tide. India trades at 18.6 times rolling 12-month forward earnings, above Taiwan's 16.8 times, and is forecast for just 11% earnings growth against an emerging-market average of 45%, the brokerage said. Its verdict: valuations remain expensive while earnings growth has disappointed.

Nomura sees a possible LTCG cut, softer global bond yields and a rupee propped up by central bank intervention as near-term supports, though geopolitical and technological uncertainty still clouds long-term growth. Hanna Luchnikava-Schorsch, head of Asia-Pacific economics at S&P Global Market Intelligence, told CNBC a tax cut alone won't trigger a major reallocation into Indian equities. Yet as cracks appear in the global AI rally, LSEG data shows Indian benchmarks have outrun global peers over the past month, and foreign flows turned positive early this month.