Rs 6 lakh crore worth FII outflows since 2024 capital gains tax hike batter Dalal Street. Is a reversal on the cards?

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FII selling India, FII outflow, LTCG tax India, capital gains tax, FII comeback, Nirmala Sitharaman LTCG, stock market tax

Following the 2024 General Elections, Finance Minister Nirmala Sitharaman in July announced an overhaul in the way India taxes profits made from the equity stock market. The tax on short-term capital gains (STCG), which essentially are profits booked within one year of purchase, was raised from 15% to 20%, while long-term capital gains tax on equities was increased from 10% to 12.5%.

Also read | FM Sitharaman's LTCG tax remarks lift Sensex by 1,100 points. Can markets hope for a review?

FII outflows intensified since 2024

Analysts had warned that the changes would spook FIIs out of Dalal Street, and the warning unfortunately came true. Foreign investors net sold Indian equities worth Rs 2,774 crore from July till the end of 2024.

Fuelled by multiple headwinds including Trump’s tariff flip-flops, the Middle East war, a weakening rupee and soaring bond yields, the FII sell-off intensified over the years. FII outflows jumped to Rs 1.66 lakh crore in 2025 and Rs 3.06 lakh crore in 2026 so far. Such heavy selling by foreign investors has added to the headwinds pressuring Indian equities following the sharp bull run of 2024.

FM Sitharaman's comments spark hopes

However, Finance Minister Nirmala Sitharaman on Tuesday said discussions around long-term capital gains tax (LTCG) and securities transaction tax (STT) were ongoing, giving investors a fresh talking point at a time when markets are looking for relief after weeks of pressure. Speaking at the Bloomberg New Economy Forum, Sitharaman said Indian and global investors have been commenting on long-term capital gains tax. She said the debate on transaction tax and whether different asset classes should be treated similarly has been well discussed.

What followed was a sharp rally on Dalal Street, with benchmark indices Sensex and Nifty jumping over 1.5% each. But FIIs were still not convinced. They remained net sellers of Indian equities, selling shares worth Rs 1,305 crore, according to provisional data on NSE.

Also read | Why did market rally on Tuesday

Can LTCG tax rejig trigger FII inflows?

FIIs may be awaiting a formal proposal for any such tax rejig, which is yet to be announced. Meanwhile, analysts highlighted that a reduction in capital gains taxes can spark sharp FII inflows, which in turn can ease some pressure on Dalal Street. Any potential change could further improve investor sentiment and support equity market participation, said Siddhartha Khemka, Head of Research, Wealth Management at Motilal Oswal Financial Services.

Gurmeet Chadha, Managing Partner and Chief Investment Officer at Complete Circle Consultants, said if the finance minister reduces LTCG and STT, India can get over $150 billion of FII and FDI flows in the next three years, surpassing FCNR deposits.

"Moreover the capital gain and STT Collections will actually go up. This is the power of capital markets . It’s a win win!" he wrote in a post on X on Wednesday.

If the Honourable FM reduces LTCG and STT, India can get over $150 Billion of FII and FDI flows surpassing even FCNR deposits in next 3 years .. Moreover the capital gain and STT Collections will actually go up. This is the power of capital markets . It’s a win win!

— Gurmeet Chadha (@connectgurmeet) October 14, 2026

Currently, there is an additional incidence of taxes in the form of Securities Transaction Tax (STT), which was introduced as such in lieu of capital gains tax. This makes transactions in equity shares expensive and less attractive, negatively impacting the inflow of foreign capital, Shah said, adding that the prospective rationalisation of LTCG taxes will also lead to the simplification of processes and compliances.

While social media went buzzing with investors praying for a total abolishment of the long-term capital gains tax, Pranay Aggarwal, Director & CEO of Stoxkart, noted that this could improve post-tax returns for eligible investors and potentially encourage longer-term equity participation. However, the extent of any increase in retail investment or foreign inflows would depend on broader market conditions, valuations and global liquidity. The government would also need to assess the potential revenue implications against any indirect economic benefits