India's Capital Gains Tax Under Fire as Markets Lag

India's equity market is experiencing significant underperformance, with benchmark indexes like the BSE Sensex and NSE's Nifty 50 among Asia's weakest performers over the last two years. This slump has intensified calls for reforms to the country's capital gains tax structure.

The Securities and Exchange Board of India has recommended tax relief for both foreign and domestic mutual fund investors. Currently, India imposes a 12.5% tax on long-term gains and up to 20% on short-term gains, with additional levies and the Securities Transaction Tax increasing the effective rates.

Foreign investors have been particularly affected, selling over $50 billion in shares since 2025, partly due to poor returns and a weakening rupee. The Finance Minister has indicated that the government is aware of these concerns and is "keenly hearing" views on taxation ahead of the annual federal budget in February. However, no commitment to tax reductions has been made.

Compared to other major markets, India's taxation of foreign portfolio investors stands out, as most countries either exempt foreign investors or tax gains in the investor's home jurisdiction.