FPIs not exempt: Centre clarifies 12.5% LTCG tax on equity is same as for domestic investors

Questions were raised in the Lok Sabha on whether Foreign Portfolio Investors (FPIs) had received preferential tax treatment.

MPs asked if FPIs had been exempted from long-term capital gains (LTCG) tax while domestic and retail investors continued to pay 12.5%, citing concerns over the “worst two-year performance of the Indian equity markets in the world.”

The Minister of Finance has now clarified that FPIs have not been exempted from LTCG tax on equity investments.

Government reply in Lok Sabha

In a written reply to the Lok Sabha on 20 July, Union Minister of State for Finance Pankaj Chaudhary clarified that “The tax rate of 12.5% on LTCG for domestic and retail investors is the same for FPIs for investments in equity.”

He explained that the recent amendment introduced through the Income-tax (Amendment) Ordinance, 2026, applies only to Government Securities (G-Secs) and not to equity investments.

What changed for FPIs in G-Secs

According to the minister, “The government has rationalised the tax treatment applicable to investments by FPIs only in Government Securities (G-Secs), by exempting such investments from income tax on any interest or capital gain.”

The exemption took effect from 1 April 2026, meaning interest income and capital gains earned by FPIs from G-Sec investments on or after that date will be exempt from Indian income tax.

Why exemption was introduced

Explaining the rationale behind the move, Chaudhary said the amendment was introduced to make India’s tax framework more competitive and attract global capital.

He added that the government had decided to rationalize the tax treatment of FPI investments in Government Securities by removing tax on both interest income and capital gains arising from such investments.

“This step will align the taxation on G-Secs with many comparable jurisdictions,” he added.

The objective is to encourage long-term foreign participation in India’s debt market by attracting stable institutional investors.

“This will ensure stable systematic inflow of durable, patient foreign capital and long-term investors such as pension funds, insurance companies, and Sovereign Wealth Funds (SWFs),” he said.

What this means for investors

This clarification puts to rest speculation that FPIs had received an exemption from LTCG tax on equity investments in India.

It makes clear that both domestic investors and FPIs continue to pay the 12.5% LTCG tax on equity investments, while the tax exemption is a targeted measure applicable only to Government Securities, intended to encourage long-term foreign investment in India's debt market.

Disclaimer: This is for informational purposes only. Please check the official websites for the latest updates.