A possible reduction in India’s long-term capital gains (LTCG) tax on equities could improve foreign investor sentiment and encourage overseas funds to reconsider their exposure to Indian stocks, according to brokerage firm Jefferies. However, no equity LTCG tax cut has been officially announced, and any change would depend on the government’s policy decisions.
The debate comes amid substantial foreign selling in Indian equities. A report published by The Economic Times on October 29, 2026, said Jefferies sees banks, Reliance Industries, utilities and real estate as potential beneficiaries if foreign portfolio investment returns.
Foreign Investors Have Reduced Their India Exposure
Jefferies’ analysis indicates that international funds have become less heavily invested in Indian equities relative to their benchmark indices. Among 70 emerging-market funds managing a combined $380 billion, India was underweighted by 0.3 percentage points, compared with an average overweight of 2.2 percentage points over the previous decade. Around 64% of the funds were underweight India.
The brokerage also reported substantial foreign outflows across recent fiscal periods. Persistent selling has raised concerns about India’s relative attractiveness compared with other emerging markets.
A change in capital-gains taxation could help improve sentiment, but tax policy is only one factor in investment decisions. Foreign investors also consider company earnings, valuations, currency movements, economic growth and returns available in other countries.
Which Sectors Could Benefit Most?
Jefferies has identified several sectors that could attract renewed foreign buying if the investment environment improves.
Banks and financial services: Financial stocks have experienced significant foreign selling, making them a key area of interest in the brokerage’s analysis. Names highlighted in the report include HDFC Bank, ICICI Bank, Axis Bank, State Bank of India and Kotak Mahindra Bank.
Energy: Reliance Industries is Jefferies’ preferred energy-sector pick in the report.
Utilities: Companies such as Power Grid Corporation and NTPC appear among the large companies identified in its analysis.
Real estate: The sector is another area Jefferies believes could benefit from a potential recovery in overseas investment.
Other large-cap companies: Bharti Airtel, Infosys, Larsen & Toubro and Tata Consultancy Services were also included among companies with substantial foreign holdings.
These are sectors and companies identified in brokerage research, not guaranteed beneficiaries or personal investment recommendations. Their performance would depend on business fundamentals, market valuations and whether foreign investors actually return.
Why a Tax Change Is Being Discussed
Under the tax rates described in the reports, qualifying long-term gains on listed equities are generally taxed at 12.5%, while qualifying short-term gains are taxed at 20%, subject to applicable conditions.
Jefferies has outlined three possible approaches to changing equity taxation:
Reduce long-term and short-term capital gains tax rates more broadly.
Introduce a lower LTCG rate specifically for foreign portfolio investors (FPIs).
Allow eligible foreign investors to calculate gains in dollar terms, potentially providing an adjustment for currency movements.
These are options discussed in the brokerage’s analysis, not confirmed government proposals. Any reduction would also need to be weighed against its impact on public revenue. Jefferies cited equity LTCG collections of ₹1.3 lakh crore in FY2025 and estimated that securities transaction tax collections were running at an annualised pace of about ₹85,000 crore in FY2027.
Can a Tax Cut Reverse Foreign Fund Outflows?
A more favourable tax regime could improve the appeal of Indian equities, but it may not be enough on its own to reverse the outflow trend. Foreign investors will continue to assess earnings growth, relative valuations, currency risk and opportunities in competing markets.
Jefferies has expressed a preference for large-cap stocks over mid-cap companies in the current environment. Whether that view translates into renewed investment will depend on actual fund flows and changes in market conditions, rather than speculation about tax relief alone.
For businesses and market participants, policy developments can also affect financial planning and assessments of market risk. Professional business advisory services can support broader financial and strategic reviews as tax rules and economic conditions evolve.