Has Capital Gains Tax Amendment (23-07-2024) Reduced FII Interest in Indian Equity Markets

[Fahiyaz Ahmmed]

Has Capital Gains Tax Amendment (23-07-2024) Reduced FII Interest in Indian Equity Markets? – Discussion

Post the Finance Act amendment dated 23-07-2024, Long-Term Capital Gains on listed equity are taxable at 12.5% u/s 112A on gains exceeding Rs. 1,25,000, whereas earlier the rate was 10% on gains exceeding Rs. 1,00,000.

At the same time:

• The Indian Rupee has weakened against the US Dollar, reducing dollar-denominated returns for Foreign Institutional Investors (FIIs).

• Competing markets such as China and Taiwan reportedly do not levy capital gains tax on equity investments for foreign investors.

• Recent data indicates net FII outflows from Indian equity markets.

Points for discussion:

1. To what extent has the increase in LTCG tax rate and reduction of exemption threshold contributed to declining FII interest in Indian equities?

2. How significant is currency depreciation risk compared to capital gains taxation in influencing FII investment decisions?

3. Is India becoming less tax-competitive compared to markets like China and Taiwan from an FII perspective?

4. Should India consider tax policy reforms (e.g., lower LTCG rates for FIIs, higher exemption limits, or currency-adjusted taxation) to attract and retain long-term foreign portfolio investment?

What tax or policy changes should India consider to improve FII participation while balancing revenue considerations?

[Fahiyaz Ahmmed]

NOTE- 

Quick Comparison (in context of India’s 12.5% LTCG)

Country	Capital Gains Tax on Listed Equity (Foreign Investors)
India	12.5% on long-term capital gains over ?1,25,000 (post 23-07-2024 amendment)
China	Generally no specific CGT on A-share gains (but ancillary taxes/conditions apply) Global Practice Guides
Taiwan	No separate CGT on listed share gains (abolished since 2016)

[Fahiyaz Ahmmed]

Comparison (approx):

Year	FII Equity Net Outflow (? Crore)
2024	~?1.21 lakh crore (net sell) PL Capital
2025	~?1.58 lakh crore (net sell) The Economic Times
2025 FII share sales total	~?2.32 lakh crore

[Fahiyaz Ahmmed]

Tax on FIIs under Section 111A – Pre vs Post Amendment

• Pre-amendment (up to 22-07-2024):
  STCG u/s 111A on equity shares was taxable at 15% for FIIs.

• Post-amendment (w.e.f. 23-07-2024):
  STCG u/s 111A is taxable at 20% for FIIs.

AI Summary

Higher capital gains tax on listed equity for FIIs u/ss 112A and 111A, effective 23-07-2024, increased rates. The amendment effective 23-07-2024 increases long-term capital gains tax on listed equity under section 112A from 10% to 12.5% and raises the taxable base by reducing the exemption threshold from gains exceeding 1,00,000 to gains exceeding 1,25,000, thereby increasing the tax incidence on qualifying long-term gains. The amendment also increases short-term capital gains tax on equity under section 111A for FIIs from 15% to 20%, thereby increasing tax cost on short-duration equity disposals. The operative consequence is a higher statutory capital gains tax burden on FII equity transactions compared to the pre-amendment regime.