The Securities and Exchange Board of India has proposed scrapping the long-term capital gains tax for foreign portfolio investors. The recommendation, part of Sebi's pre-Budget submissions, targets a $64 billion equity outflow by FIIs over the past two years. Currently, FPIs pay a 12.5% LTCG tax on listed equity held for more than a year. The final decision rests with the government, which collected ₹1.29 trillion from equity LTCG in FY25, about 2.9% of its budgeted gross tax receipts for FY27.
Analysts say the tax relief would reduce investment costs but is unlikely to trigger sustained inflows by itself. JM Financial estimates removal could add $3–5 billion to FY28 inflows in a bull case, raising the response of flows to a rising market rather than creating the rise. Bernstein notes a tax cut would be desirable for a capital-starved economy but would not alone bring FIIs back.
The crude oil condition
The primary barrier to FII return is the price of Brent crude. JM Financial's analysis shows that since 2016, FIIs sold in six of the seven months when Brent averaged above $105 a barrel, pulling out an average of $4.1 billion monthly. Selling stops when oil falls below about $90. Brent was at $106.84 on November 2. This threshold relationship has held despite cheaper Indian equity valuations and an improving earnings outlook.
For portfolio managers assessing regulatory tailwinds, the Sebi proposal is a potential amplifier of future inflows. Its effectiveness, however, is conditional on a secondary trigger: a sustained drop in crude oil prices below the $105 threshold. Until that happens, the tax incentive remains a parked tool, waiting for the macro overhang to clear.