SEBI is reportedly seeking changes to India’s long-term capital gains (LTCG) tax rules ahead of the Union Budget 2027. The regulator has proposed removing LTCG tax on foreign investors’ equity gains and offering tax relief to domestic investors when they switch between mutual fund schemes.
The recommendations could affect both overseas investors and everyday mutual fund investors. However, these are only proposals, and the government has not approved any changes to the existing tax rules.
This article explains SEBI’s LTCG tax proposals, the existing tax rules, and how the suggested changes could affect foreign investors and domestic mutual fund investors. It also looks at what investors should expect ahead of Budget 2027.
What Has SEBI Proposed on LTCG Tax?
There are two separate proposals. They affect two different groups of investors.
Proposal 1: No LTCG Tax for Foreign Investors
SEBI has recommended scrapping LTCG tax on equity investments made by foreign investors. Foreign portfolio investors (FPIs) are overseas funds and institutions that buy Indian shares.
Under current rules, eligible long-term gains from listed equity shares and equity-oriented mutual funds are generally taxed at 12.5%, subject to applicable conditions. Short-term gains from qualifying equity transactions are taxed at 20%. Applicable surcharge and cess may also apply.
FPIs also pay securities transaction tax (STT) on trades, so the costs add up. Reports say SEBI has pointed to high transaction costs in Indian markets.
Proposal 2: Tax Relief When You Switch Mutual Fund Schemes
Switching means moving your money from one mutual fund scheme to another. For example, you may move from a large-cap fund to a flexi-cap fund, even within the same fund house.
The tax rules do not see this as a simple move. Today, a switch is generally treated as a redemption from the old scheme and a fresh investment in the new one. That means any profit on the old units can be taxed right away, even though no money reached your bank account.
SEBI has suggested that no LTCG tax should apply on a switch if the investor has held the existing units for more than a year. Reports do not spell out which types of schemes would qualify, so we should not assume.
A simple example: You invested ₹3 lakh in an equity fund two years ago. It is now worth ₹5 lakh. You switch the full amount to another equity fund.
Under current rules, you have a ₹2 lakh gain. After the ₹1.25 lakh exemption, ₹75,000 is taxed at 12.5%. That is ₹9,375, before cess. You may have to pay this tax even though the money has not been withdrawn to your bank account. Under SEBI’s idea, a switch like this would not trigger that tax.
This example assumes the fund qualifies as an equity-oriented mutual fund, the applicable STT conditions are met, and you have no other eligible LTCG in the financial year.
Why Is SEBI Recommending These Changes?
The main background is heavy selling by foreign investors. According to depository data (CDSL), FPIs pulled ₹34,843 crore out of Indian equities in October and ₹35,861 crore in September. Total outflows in 2026 had reached approximately ₹2.95 lakh crore by the end of October.
However, foreign investors returned as net buyers in the final week of October, putting in around ₹6,300 crore. So selling was not uniform through the month. Experts say this does not necessarily mean a lasting reversal.
Reuters reported that SEBI’s recommendations follow several rounds of talks with overseas investors over the past two years. Taxation came up again and again as a concern, according to its sources.
On the domestic side, the reported proposal is aimed at encouraging investors to remain invested in mutual funds. It would do this by making portfolio rebalancing less costly from a tax perspective.
Market experts say tax is not the only factor. Earnings growth, valuations, and a stable rupee also decide whether foreign money returns. Lower tax alone may not be enough.
What Are the Current LTCG Tax Rules in India?
The Income-tax Act, 2025 replaced the Income-tax Act, 1961 from April 1, 2026. The tax rates for eligible listed-equity gains remain unchanged. Under Section 198 of the new Act, qualifying long-term gains from listed equity shares and equity-oriented mutual funds are taxed at 12.5% on gains exceeding ₹1.25 lakh in a financial year, subject to applicable STT conditions. Tax treatment of foreign investors can involve additional provisions.
These rules apply only to listed equity shares and equity-oriented mutual funds. Debt funds and other schemes can be taxed differently, so do not apply these numbers to them.
- Long-term holding: More than 12 months for listed equity shares and equity-oriented mutual fund units.
- LTCG tax: 12.5% on eligible gains above ₹1.25 lakh in a financial year.
- Short-term holding: 12 months or less, with eligible gains taxed at 20%.
- Mutual fund switch: Generally treated as a transfer, with applicable capital gains tax.
The 12.5% rate and ₹1.25 lakh limit came in with the Union Budget 2024-25, effective July 23, 2024. LTCG tax on listed equity itself returned in 2018, after a gap since 2004.
| Issue | Current position | SEBI’s reported proposal |
| Foreign investor LTCG | 12.5% on eligible long-term equity gains | Remove LTCG tax |
| Mutual fund switching | Taxable transfer, subject to applicable rules | No LTCG tax on eligible switches after one year |
| Status | Existing rules apply | Recommendations awaiting government decision |
Who Could Benefit If These Proposals Are Accepted?
Foreign portfolio investors: Their tax cost of holding Indian shares would fall. Some brokerages have said lower capital gains tax could improve foreign investor sentiment and support inflows.
Indian mutual fund investors: Those who rebalance could do it without a tax bill each time, provided they meet the one-year condition. Redeeming and withdrawing money would still be taxed. Relief would apply only to switches.
The Indian stock market: Steadier foreign flows could help share prices and the rupee. But this is a possibility, not a promise. The government would also have to weigh the loss of tax revenue before accepting any such change.
Will LTCG Tax Change in Budget 2027?
Nobody can say yet. The finance ministry will decide whether any of these ideas make it into the Budget in February 2027. As of November 4, 2026, we found no official announcement accepting either proposal.
Until the government notifies a change, the existing rules continue to apply. That means 12.5% LTCG tax for foreign investors and tax on mutual fund switches for domestic investors. Watch the Budget speech and the Finance Bill for the final word.
Conclusion
SEBI has reportedly recommended two changes to India’s LTCG tax rules. One could reduce the tax burden on foreign equity investors. The other could make it easier for domestic mutual fund investors to switch schemes without an immediate LTCG tax liability.
Both proposals are awaiting a government decision. Until an official announcement is made, investors should continue to follow the existing tax rules.
FAQs
Has SEBI scrapped LTCG tax?
No. SEBI has only recommended it to the government. Only the government can change tax rules.
What is the current LTCG tax rate on equity?
It is 12.5% on eligible gains above ₹1.25 lakh a year, for listed equity and equity-oriented mutual funds held for more than 12 months.
Is switching mutual fund schemes taxable today?
Generally, yes. A switch is treated as a transfer, so capital gains tax can apply, subject to the applicable rules.
Will all investors be exempt from LTCG tax?
No. The reported proposals cover foreign investors, plus domestic mutual fund switches after a one-year holding.
When will we know the outcome?
Possibly in the Union Budget in February 2027. Until then, current rules apply.
ARN Disclosure: Investik Future is an AMFI-registered Mutual Fund Distributor. ARN-341107 — Verify on AMFI ↗. Komal Thakur is the content author and digital marketer; the ARN registration belongs to Investik Future, not to the author personally.
