How does India tax equity investors?

By Jayshree P Upadhyay and Vivek Kumar M

Nov 2 (Reuters) - India's markets regulator, the Securities and Exchange Board of India, has recommended tax relief for foreign investors and domestic mutual fund investors.

India's benchmark stock indexes are among Asia's weakest performers, prompting calls from investors for reforms to improve post-tax returns. The BSE Sensex .BSESN and NSE's Nifty 50 .NSEI are down 6.2% and 4.8% respectively over the last two years.

THE TAXES

Domestic and foreign investors are taxed alike in India.

A 12.5% tax is imposed on gains made on shares held for more than one year, while for shares held for less than 12 months taxes go up to 20%.

In addition, India often adds additional levies for purposes ranging from health to education, which means the effective tax rate can rise to nearly 15% on long-term gains and almost 24% on short-term gains.

Investors are also subject to the Securities Transaction Tax, levied on the value of each trade. The amount of STT varies for cash equities and equity derivatives.

Foreign investors are subject to a withholding tax on dividends from listed equities at 20%.

WHY THE CALL TO RATIONALISE TAXES?

India's benchmark Nifty 50 index .NSEI is down 4.8% over the last two years and 11% down so far in 2026, setting the stage for its worst annual performance in 1-1/2 decades, in contrast to about a 40% jump in MSCI's Emerging Markets index .dMIEF00000PUS in the last two years.

Poor returns and a weakening of the Indian rupee — which further erodes returns — have also led to foreign investors selling shares worth more than $50 billion since 2025.

Investors have argued that reducing taxes can help improve the post-tax returns for Indian equities.

WHAT DOES THE INDIAN GOVERNMENT SAY?

Tax decisions are typically announced at the time of the annual federal budget in February, although nothing prevents the government from announcing changes at other times.

Last month, Finance Minister Nirmala Sitharaman said both domestic and foreign investors had raised concerns over the long-term capital gains tax and securities transaction tax, adding that she would be "keenly hearing" views on the issue ahead of the budget early next year.

At an event in Mumbai on Monday, she said, that to sustain 7% growth, India needs equity capital - and that the concerns over taxation had grown louder.

The government has not committed to any tax reduction.

TAXES ON EQUITIES HAVE PROGRESSIVELY INCREASED

India has had a history of capital gains taxes but long-term capital gains (LTCG) tax on listed equities was abolished in 2004 when the government introduced the Securities Transaction Tax (STT).

It was reintroduced at 10% in 2018 while STT was retained.

In 2024, the government raised the LTCG rate to 12.5% and the short-term capital gains (STCG) rate to 20%, increasing the tax burden on equity investments.

But this year, India scrapped long-term ‌capital ⁠gains tax for foreigners investing in Indian debt.

DO OTHER COUNTRIES LEVY CAPITAL GAINS TAX?

India's treatment of foreign portfolio investors stands out internationally because it taxes capital gains in the country where the gains are made.

Most major markets either exempt foreign investors from capital gains tax altogether or allow gains to be taxed in the investor's home jurisdiction.

Markets such as the United States, Britain, Singapore, Hong Kong, UAE, Saudi Arabia, South Africa and, in most cases, Brazil do not levy capital gains tax on foreign portfolio investors, brokerage firm IIFL said in a note this year.