Marcellus Investment Managers believes abolishing capital gains tax on foreign institutional investors could unlock fresh overseas inflows, strengthen the rupee and reduce the government’s borrowing costs at a relatively modest fiscal cost.
India should consider eliminating capital gains tax (CGT) on foreign institutional investors (FIIs) to regain its appeal as a preferred destination for global capital, according to a recent newsletter by Marcellus Investment Managers.
The investment firm argues that such a move could generate benefits extending far beyond the equity market, including lower sovereign borrowing costs, a stronger rupee, improved foreign exchange stability and faster economic growth through a lower cost of capital.
The recommendation comes at a time when foreign investors have been pulling money out of Indian equities at an unprecedented pace. According to Marcellus, FIIs withdrew nearly ₹3 trillion from Indian stocks in 2025, followed by another ₹3.4 trillion during the first six months of 2026. Foreign ownership of Indian equities has consequently fallen to its lowest level in around 15 years.
Global investors remain positive on India but taxation remains a hurdle
Marcellus said its recent meetings with pension funds, endowments and family offices across the US, Canada and the UK revealed that global investors continue to view India’s long-term structural growth story positively.
However, many large investors see India’s capital gains tax regime as an outdated policy that reduces the country’s competitiveness against other major investment destinations.
According to the firm, virtually every major developed and emerging market—including the US, UK, Germany, Japan, South Korea, Brazil, China and Taiwan—does not levy comparable capital gains taxes on foreign portfolio investors investing in listed equities.
India, by contrast, currently imposes a 12.5% long-term capital gains tax and a 20% short-term capital gains tax on foreign equity investors.
Marcellus argues that this difference has become increasingly important as investors now have multiple attractive alternatives across global markets, ranging from Japan’s corporate reforms and South Korea’s Value-Up programme to Taiwan’s semiconductor-led growth and Brazil’s comparatively inexpensive equity valuations.
Fiscal cost may be modest compared to economic gains
One of the central arguments made by Marcellus is that exempting FIIs from capital gains tax would have only a limited impact on government revenues.
Annual capital gains tax collections from listed equities are estimated at around ₹1 trillion. Since foreign investors currently own roughly 15% of India’s listed market capitalisation, the potential revenue foregone could be about ₹15,000 crore annually.
The investment firm believes the broader macroeconomic gains could more than compensate for this cost.
Higher foreign equity inflows would strengthen India’s capital account, reduce the country’s risk premium and lower government borrowing costs. Marcellus estimates that even a 50 basis-point decline in sovereign bond yields could save the government approximately ₹8,000 crore in interest costs during the first year on fresh debt issuance alone, with savings increasing over time as older debt gets refinanced.
Lower sovereign borrowing costs could also translate into cheaper financing for Indian companies, encouraging private investment and supporting economic expansion.
Why domestic and foreign investors need not be taxed equally
Marcellus acknowledges that exempting foreign investors while continuing to tax domestic investors could appear inequitable.
However, it argues that foreign portfolio capital is fundamentally different because it is globally mobile. International investors constantly compare post-tax returns across countries and can shift capital rapidly to markets offering superior risk-adjusted returns.
Domestic investors, on the other hand, have comparatively fewer alternatives and continue to find equities attractive despite capital gains taxes, especially when compared with the much higher tax incidence on fixed-income investments.
According to the firm, tax policy for globally mobile capital should therefore be evaluated based on its contribution to national economic welfare rather than identical treatment of different investor categories.
Recent debt market reforms provide a template
Marcellus also points to the government’s recent tax changes for foreign investors in sovereign bonds as evidence that reducing tax friction can quickly attract overseas capital.
Following the removal of remaining withholding tax and capital gains tax impediments on Fully Accessible Route (FAR) government securities earlier this year, foreign investors reportedly brought in more than ₹35,000 crore into the debt market within weeks. Benchmark 10-year government bond yields also declined by around 15 basis points.
The firm believes a similar policy approach for equities could generate even greater long-term benefits because equity investments represent permanent risk capital rather than fixed repayment obligations.
Unlike foreign debt, equity capital absorbs business risks and does not increase sovereign repayment liabilities during periods of economic stress.
Strengthening India’s capital account
Marcellus also highlights broader structural challenges facing India’s external sector.
The newsletter notes that India’s IT services exports, which have supported the country’s balance of payments for decades, could increasingly face disruption from advances in artificial intelligence.
While manufacturing exports may eventually emerge as a major growth engine, that transition is expected to take time.
During this period, attracting stable foreign equity capital becomes increasingly important for financing investment, supporting infrastructure development and maintaining currency stability.
A stronger rupee would also help contain imported inflation and potentially provide additional room for monetary easing by the Reserve Bank of India.
A policy with outsized potential
According to Marcellus, reducing or eliminating capital gains tax for foreign institutional investors represents one of the few policy tools currently available that could materially improve India’s competitiveness for global capital without significantly affecting fiscal consolidation.
The firm concludes that the potential economic gains—from stronger capital inflows and lower borrowing costs to improved currency stability and faster investment-led growth—could substantially outweigh the relatively modest fiscal cost of foregoing tax collections from foreign investors.
