Foreign Portfolio Investors Push for Tax Policy Review Amid Significant Outflows
In a significant development from New Delhi, foreign portfolio investors (FPIs) have formally requested a comprehensive review of the tax framework applicable to their investments in India, with particular emphasis on capital gains taxation. This move comes against the backdrop of substantial capital outflows from Indian markets, raising concerns about the country's investment attractiveness.
Tax Certainty and Policy Clarity Demanded
According to sources familiar with ongoing deliberations, FPI representatives have raised these concerns directly with both the Securities and Exchange Board of India (Sebi) and government officials. The central theme of their argument revolves around the need for greater certainty and stability in tax policies, which they believe would enhance India's appeal as an investment destination.
The Burden of Multiple Levies and Charges
FPIs have highlighted several structural challenges that increase their cost of trading in India:
- Brokerage fees that add to transaction costs
- Stamp duty charges on securities transactions
- Securities Transaction Tax (STT) levied on equity trades
- Sebi turnover fees for market regulation
- Exchange transaction fees for trading platform usage
- Custody fees for safekeeping of securities
"The cumulative effect of these multiple charges creates a significant cost burden," noted one industry representative familiar with the discussions.
The Double Taxation Dilemma
A particularly contentious issue raised by FPIs involves what they describe as double taxation on capital gains. The problem manifests in two distinct layers:
- FPIs themselves face capital gains tax on their investments in Indian securities
- Individual investors in these foreign funds can be taxed again in their home countries when they receive distributions from the FPI
Compounding this issue is the practical difficulty in obtaining foreign tax credits. "The complex structure of fund investments and varying foreign tax credit regimes across countries make it challenging for investors to claim credits for taxes paid in India," explained a tax expert specializing in cross-border investments.
Historical Context of Capital Gains Taxation
The current tax landscape represents a significant shift from previous policies. Before 2004, capital gains on listed equity securities were taxable in India, but long-term capital gains (LTCG) were abolished when STT was introduced that year. This changed dramatically in 2018 when LTCG on listed equity transactions returned with a 10% tax above specified thresholds, which was subsequently increased to 12.5% last year.
"India stands among a limited number of global markets that impose both STT and capital gains tax," observed a financial analyst tracking FPI trends.
Additional Operational Challenges
Beyond direct taxation issues, FPIs have identified several operational hurdles:
- Computation-related complexities in tax assessments
- Restrictions on setting off capital losses under specific circumstances
- Significant delays in tax refund processing
A tax specialist from a prominent consulting firm emphasized that these factors collectively diminish India's competitive edge in attracting foreign investment, particularly during periods of global economic uncertainty.
Quantifying the Outflow Trend
The urgency of these discussions is underscored by recent market data. So far this year, FPIs have recorded net equity sales of approximately Rs 33,600 crore, representing the highest monthly outflow since August, when sales reached Rs 35,000 crore. Looking at the broader picture, data from the NSDL website indicates that in 2025, FPI net sales approached nearly Rs 1.7 lakh crore, highlighting a sustained trend of capital withdrawal from Indian markets.
This combination of structural tax challenges and significant capital outflows has created a compelling case for policy review, with FPIs hoping for reforms that could reverse the current trend and restore India's position as a preferred investment destination.
