Attracting Foreign Capital Needs More Than Tax Cuts, Pg10

Key Highlights:

• Foreign portfolio investors have withdrawn $51 billion from Indian equity markets since 2024-25.
• This outflow has prompted calls for a review of India's Long-Term Capital Gains Tax regime.
• Globally, capital is increasingly moving towards the AI ecosystem and developed markets offering higher yields, with the 10-year US bond yield hovering around 4.9%.
• Finance Minister Nirmala Sitharaman has cautioned against viewing tax concessions as the primary driver of stock market performance.
• In June 2026, the Indian government provided tax exemptions on interest income and capital gains for Foreign Portfolio Investors (FPIs) in government bonds to attract capital inflows.

FPI Outflow.jpg

Detailed Insights:

• India's diminished attractiveness to global investors is influenced by factors beyond its tax structure, including global investment shifts.
• The global focus on the AI ecosystem, where India's presence is not yet significant, is diverting capital to major players like Nvidia, Google, Samsung, and TSMC.
• Rising yields in developed markets, particularly the US, increase the "risk-free rate," making these markets more appealing for capital allocation.
• The government's June 2026 measures to exempt FPIs from income tax on interest and capital gains from Government Securities (G-Secs) aim to enhance India's bond market appeal.
• Introducing tax concessions for foreign investors could raise concerns about discrimination against domestic rupee investors.
• Policymakers are advised to avoid curbing domestic outflows, as remittances under the Liberalised Remittance Scheme (LRS) exceeded $20 billion in the first eight months of 2026.

Key Concepts Involved:

• Foreign Portfolio Investors (FPIs): Overseas entities investing in a country's financial assets like stocks and bonds.
• Long-Term Capital Gains Tax (LTCG): Tax levied on profits from the sale of assets held for more than a specified period, typically over 12 months for equities in India.
• Liberalised Remittance Scheme (LRS): An RBI framework allowing resident individuals to remit up to USD 250,000 abroad per financial year for various permissible transactions.
• AI Ecosystem: The interconnected network of companies, technologies, and investments focused on artificial intelligence development and application.