Capital Gains and What Changed in 2025

India’s Capital Gains Tax on Foreign Investors: A Policy Backfire: A capital gains tax is charged on profits made from selling capital assets like shares, property, or gold. These gains are divided into short-term (STCG) and long-term (LTCG) depending on how long you hold the asset. While STCG on equities is taxed at 15%, LTCG has become controversial in 2025 after the Indian government made changes in the Union Budget. The new LTCG tax rate is 12.5%, but the key issue is the removal of the indexation benefit—a mechanism that earlier allowed adjustments for inflation, helping reduce tax liability for long-held assets.

Why Foreign Investors Are Unhappy

These changes have not gone down well with foreign institutional investors (FIIs). Unlike domestic investors, many foreign investors do not get double taxation relief in their home countries. Without indexation, their effective tax burden increases. Market expert Samir Arora called the move a “big mistake,” warning that this could damage India’s investment reputation. The absence of inflation adjustment makes India’s tax rules seem less investor-friendly compared to other major economies.

Real Impact: FII Exit and Market Consequences

The response has been sharp. Since October 2024, FIIs have withdrawn over ₹2 trillion from Indian markets. This is not only due to the tax hike but also due to a weakening rupee, falling corporate earnings, and higher yields in US markets. As foreign money exits, stock market volatility rises, liquidity dries up, and domestic sentiment weakens. For India, which relies on foreign capital to drive economic growth, this is a worrying signal.

How Does India Compare Globally?

In global terms, India’s capital gains tax regime is now less competitive. For instance, Australia taxes only 50% of capital gains, the US offers lower rates for long-term holdings, and the UAE imposes no capital gains tax at all. With many investors looking to park money in tax-friendly economies, India risks losing its appeal as a top emerging market destination. The current regime may also discourage long-term investment in real estate and startups.

The Road Ahead: Can the Policy Be Revisited?

There are growing calls from industry leaders and economists to reintroduce indexation and simplify capital gains tax rules. A more balanced approach—especially for foreign investors—could include tax treaty exemptions or alternate relief methods. If India wants to attract stable foreign investments and promote wealth creation, the government may need to strike a better balance between tax revenue and investor confidence.

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India’s Capital Gains Tax on Foreign Investors: A Policy Backfire: