Jefferies: Equity LTCG tax cut could lift FPI flows, rupee

Potential equity LTCG tax cut could boost foreign inflows, support rupee: Jefferies

New Delhi, October 29

The report, noted that discussions around a possible tax cut have gathered pace, although no decision has been announced.

"An equity LTCG cut may similarly help improve FPI sentiment and flows providing support to the INR," Jefferies said.

The brokerage firm noted that capital-account weakness has been a key source of pressure on the rupee, with equity-market-related exits by foreign portfolio investors (FPIs), foreign promoters and foreign private equity investors totalling USD 110 billion since April 2025.

Its analysis of 70 large emerging-market funds managing USD 380 billion showed India was underweight by 0.3 percentage points, compared with a 10-year average overweight position of 2.2 percentage points, suggesting relatively light foreign investor positioning.

A recovery in foreign flows could particularly benefit sectors that have experienced substantial selling. Financials recorded net FPI outflows of USD 16 billion between October 2024 and September 2026, followed by information technology and consumer staples at USD 10 billion each.

"Within these oversold sectors, Banks are our key preference, while we also prefer Energy (RIL), Utilities & Real Estate," the report said.

Jefferies preferred large-caps over mid-caps, noting that large-caps traded at a 23 per cent valuation discount to mid-caps, against a 10-year average discount of 20 per cent, while the earnings-growth gap was expected to narrow.

Possible policy options include an across-the-board reduction in long-term and short-term capital gains taxes, an FPI-specific LTCG cut, or calculating foreign investors' gains in US dollar terms.

However, revenue considerations could influence any decision. Equity LTCG tax and securities transaction tax (STT) together accounted for 8 per cent of direct taxes and 5 per cent of gross tax revenue in FY25.

"Given fiscal pressures (link), govt. may need to offset potential revenue loss from any LTCG tax reduction," it said.

India's equity taxation has undergone several changes. In 2004, LTCG tax on qualifying listed equity transactions was abolished, STT was introduced and short-term capital gains tax was set at 10 per cent. The short-term rate rose to 15 per cent in 2008.

In 2018, LTCG tax was reintroduced at 10 per cent on qualifying annual gains exceeding Rs 1 lakh, while STT continued. In July 2024, the LTCG rate increased to 12.5 per cent and the short-term rate to 20 per cent, while the annual LTCG exemption threshold rose to Rs 1.25 lakh.

— ANI