Potential LTCG tax cut could revive FIIs’ India bet, says Jefferies: Which stocks may benefit most?
The brokerage said an equity LTCG cut could improve foreign portfolio investor sentiment and support both Indian equities and the rupee, even as the government weighs the revenue loss against the need to make Indian markets more competitive.
“Chatter around a potential Equity LTCG tax cut has picked up though no decision has been announced,” Jefferies said in a strategy note. The government will need to balance the potential fiscal impact of any tax relief against the broader objective of converging taxation across asset classes, it said.
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FIIs’ India positioning at decade low
Foreign investors have remained persistent sellers of Indian equities, with net outflows of $21 billion in fiscal 2026 followed by another $16.5 billion in fiscal 2027 through Oct. 23, according to Jefferies.
India’s equity market related foreign exits have reached $110 billion over the past two years, including outflows from foreign portfolio investors, foreign promoters and private equity investors.
Positioning among global emerging market funds is also weak. India is currently underweight by 0.3 percentage points among 70 large emerging market funds managing a combined $380 billion, compared with an average overweight of 2.2 percentage points over the past decade. As many as 64% of these funds are underweight India relative to their benchmark.That leaves room for a revival in flows if the tax regime becomes more favourable, Jefferies said.
The brokerage noted that foreign investors’ positioning in Indian equities is now “light”, while recent tax relief for foreign investors in government securities led to a sharp pickup in debt inflows. Debt FPIs brought in $9 billion during June and July 2026 after the measures.
“An equity LTCG cut may similarly help improve FPI sentiment and flows providing support to the INR,” Jefferies said.
Banks, RIL among potential beneficiaries
Financials have seen the largest foreign outflows since October 2024, at $16 billion, followed by information technology and consumer staples at $10 billion each.
“Within these oversold sectors, Banks are our key preference, while we also prefer Energy (RIL), Utilities & Real Estate,” Jefferies said.
A return of foreign flows could therefore benefit large financial stocks such as HDFC Bank, ICICI Bank, Axis Bank, State Bank of India, Kotak Mahindra Bank, Bajaj Finance and Shriram Finance.
Reliance Industries is the brokerage’s named energy preference. Other large stocks identified in Jefferies’ list of the 25 companies with the highest foreign holdings include Bharti Airtel, Infosys, Larsen & Toubro, Tata Consultancy Services, Power Grid Corp., NTPC, Titan, Maruti Suzuki, Apollo Hospitals, Adani Power and Adani Ports.
Jefferies stressed that it prefers largecaps over midcaps. Largecaps have outperformed by 5 percentage points in 2026 and are trading at a 23% valuation discount to their 10-year average discount of 20%, even as the earnings growth gap is expected to narrow.
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Tax relief faces fiscal constraints
The government’s equity tax regime has tightened over time. Long-term capital gains tax on listed equities was abolished in 2004, while STCG was set at 10% and the Securities Transaction Tax was introduced.
LTCG was reintroduced in 2018 at 10%. In 2024, the rates were raised further, with LTCG increasing to 12.5% and STCG to 20%.
Earlier in the week, The Economic Times reported that the government has sought the views of investors, market functionaries and tax experts on LTCG and securities transaction tax (STT) as it begins a reassessment of capital market levies amid an exodus by FIIs.
But any reduction would come at a cost. Equity LTCG collections stood at Rs 1.3 lakh crore in FY25, while STT collections are running at an annualised pace of about Rs 85,000 crore in FY27.
Combined, LTCG tax on equities and STT accounted for 8% of direct tax collections and 5% of total gross tax revenue in FY25.
Three possible routes
Jefferies identified three possible ways to rationalise equity taxation: an across the board cut in LTCG and STCG rates, a reduction specifically for FPIs, or allowing FPIs to calculate gains in dollar terms to provide some indexation benefit.
An out of budget capital gains tax change could be implemented through the Ordinance route, similar to the recent tax relief granted to specific foreign investors in Indian government bonds, Jefferies said.
A key issue is the wide gap between long- and short-term capital gains tax rates, which industry participants believe may be suboptimal.
If the government does move toward an LTCG cut, Jefferies believes the first beneficiaries are likely to be large financial stocks, Reliance Industries, utilities and real estate companies rather than the broader mid- and small-cap universe.
(Disclaimer: This article has been written by Nikhil Agarwal, who is not a SEBI-registered Research Analyst or an Investment Adviser. Nikhil Agarwal and his/her ‘relative(s)’ (as defined under Section 2(77) of the Companies Act, 2013) do not hold any financial interest in the companies mentioned in this article as of the date of publication. The views/recommendations mentioned in this article, wherever applicable, are those of the respective SEBI-registered Research Analyst/brokerage and have been reproduced/reported with due attribution. They should not be construed as the views or recommendations of The Economic Times Digital or the journalist. Readers are advised to consider the original research report and make their investment decisions based on their own assessment. Brokerage disclaimers here)
