India's capital market regulator and prominent industry bodies are pushing the government to eliminate the long-term capital gains (LTCG) tax for foreign portfolio investors as the country faces unprecedented capital outflows [1]. Foreign investors have withdrawn $18.9 billion in 2025 and over $30 billion so far this year, with foreign holdings in Indian stocks reaching an all-time low of 14% according to a Nomura report [1]. India's Finance Minister Nirmala Sitharaman acknowledged the capital outflows on Monday and stated she would consider reviewing the LTCG tax, which was increased in 2024 [1]. The PHD Chamber of Commerce and Industry argued that the tax increase occurred when the stock market was near record highs, and with changed market conditions, the government should reconsider the policy [1].
However, experts caution that a tax cut alone may be insufficient to reverse the foreign investor exodus [1]. Amit Bhartia, portfolio manager at Singapore-based Delorean Partners, noted that "allocators tend to buy expected returns, not tax breaks," highlighting that foreign investors exited India due to less predictable earnings growth and increased risks rather than tax considerations [1]. He pointed to September 2024 when foreign investors deployed approximately 570 billion rupees ($6 billion) into Indian equities, only to withdraw 940 billion rupees a month later to pursue cheaper Chinese stocks—a shift that occurred without any change in tax rates [1]. The underlying issue appears to be valuation concerns, as India is trading at a rolling 12-month forward price-to-earnings ratio of 18.6 times, higher than Taiwan and Korea, while its earnings growth is expected to be significantly slower than other emerging markets [1].
CONCLUSION
While India's government is considering removing the LTCG tax for foreign investors to address record capital outflows, market experts suggest this measure alone will not reverse the exodus. The core issue driving foreign investor departures appears to be valuation concerns and unpredictable earnings growth rather than tax policy, indicating that structural market reforms may be necessary to restore investor confidence.