Explained: How does Budget 2025 fix LTCG tax discrepancy for foreign investors?

Keeping in line with last year’s announcement of raising tax rates for foreign investors on long-term capital gains (LTCG) on equity assets to 12.5%, the Union Budget 2025 has raised LTCG on other securities as well.

The Finance Bill 2025 has proposed to hike the LTCG tax on income from certain securities from 10% to 12.5% from April 1, 2026, for foreign investors.

The amendments will take effect from April 1, 2026, and not April 1, 2025.

“These amendments apply in relation to the assessment year 2026-27 and subsequent assessment years,” the Finance Bill said.

What exactly changes for foreign investors?

The Union Budget 2024 had already raised LTCG tax for foreign investors under Section 112A to 12.5%, which applied to listed equity shares, equity-oriented mutual funds and units of business trusts.

However, the rate of income tax calculated on the income by way of LTCG not referred to in Section 112A was retained at 10% in the Finance Act 2024.

Now, the Finance Bill 2025 has proposed the amendment to ensure that LTCG on all other securities, which were previously not covered under Section 112A, be also taxed at 12.5%.

The Finance Bill 2025 said, “It is proposed to amend the provisions of section 115AD to provide that income-tax on the income by way of long-term capital gains on transfer of securities (other than units referred to in section 115AB) not referred to in section 112A, if any, included in the total income, shall be calculated at the rate of 12.5%.”

Impact of the amendment

The move is primarily aimed at bringing tax consistency and rectifying any tax discrepancy. For foreign investors, it will align the tax rate of all securities with the rate for listed shares and equity-oriented mutual funds.

Experts noted that the amendment introduced in the Budget 2024 did not cover assets such as government securities, bonds and non-convertible debentures (NCDs). These assets continued to be taxed at 10% for long-term gains. The Union Budget 2025 seeks to amend that to raise the LTCG rate to 12.5% for these assets as well, bringing it on par with the tax applicable to domestic investors.

According to experts, the change in tax rate on debt investments could lead to some liquidation of investments before the new tax rate kicks in on April 1, 2026. However, foreign investors’ overall exposure to India may not change due to this amendment. Investors may just reallocate funds to different asset classes as tax rates turn uniform across different securities.

FII outflows

After the LTCG tax was raised for foreign investors in the Union Budget 2024, Indian equities have seen heavy selling by foreign institutional investors (FIIs). On the Budget day, on February 1, FIIs offloaded ₹1,327.09 crore net in Indian equities in the cash segment.

In January 2025, FIIs recorded net sales of ₹87,374.66 crore, the highest-ever outflow registered for the month of January. FIIs were net sellers in October, November and December 2024 as well.

The foreign investors were selling due to multiple factors like strengthening of the US dollar, subsequent weakening of the Indian rupee and expensive valuations of Indian stocks, according to experts. Anticipation of trade war after the US imposed higher tariffs on Mexico, Canada and China are also keeping foreign investors on the edge, making them reluctant to make fresh investments in emerging economies like India.