Opinion | How India Is Making Its Stock Market An Expensive Place To Invest

 India's stock market is facing growing concerns over declining foreign investment, with high capital gains taxes and additional transaction costs increasingly influencing international investors' decisions. A sharp rise in foreign fund outflows has raised questions about whether the country's taxation policies are making its equity market less competitive compared with other major financial centres.

Foreign Portfolio Investors (FPIs) sold Indian equities worth Rs 1.66 lakh crore in 2025. The selling intensified in 2026, reaching a record Rs 3.08 lakh crore by October 12. Foreign ownership of Indian equities has consequently fallen to its lowest level in 15 years.

Foreign investors are pulling billions from Indian equities as high taxes and transaction costs raise market concerns.

High Tax Rates Raise Investment Concerns

One of the major concerns highlighted in the debate is India's capital gains taxation system. Under the current framework, long-term capital gains on listed equities attract a 12.5% tax, while short-term gains are taxed at 20%. Investors must also account for the Securities Transaction Tax (STT), which increases the overall cost of trading.

These charges have prompted comparisons with international markets such as Singapore, Hong Kong and the United Arab Emirates, where capital gains taxes are generally absent.

The argument is that foreign investors evaluating potential returns across different countries may increasingly favour markets with more competitive tax structures.

Foreign Investment Outflows Put Pressure on the Market

The continued withdrawal of foreign capital has also raised concerns about India's position in global investment portfolios.

India's representation in the MSCI Emerging Markets Index has reportedly declined significantly from its September 2024 level. This could make international fund managers reconsider the amount of dedicated investment they allocate to Indian equities.

Currency depreciation adds another challenge, as overseas investors must consider exchange-rate movements alongside stock market performance when calculating their actual returns.

Government Defends Equity Taxation

The government has previously defended capital gains taxation, highlighting its contribution to public revenue and the importance of maintaining fairness between different categories of taxpayers.

Equity-related long-term capital gains tax collections reached Rs 1.29 lakh crore in 2024-25, compared with Rs 72,249 crore in the previous financial year.

Domestic institutional investors have also played an important role in supporting the market, purchasing shares even as foreign investors continued to reduce their exposure.

However, critics argue that domestic buying alone may not fully compensate for declining international participation over the longer term.

Calls Grow for Changes to Investment Tax Rules

The debate has gained further attention following the government's decision to provide tax exemptions on interest and capital gains from certain government securities held by foreign portfolio investors in 2026.

Supporters of reform believe similar incentives should be considered for foreign investments in listed equities.

Proposals include restoring tax exemptions on long-term equity gains for non-resident investors or allowing foreign investors to calculate capital gains using the currency in which their investments were originally made.

The broader challenge for policymakers is balancing tax revenue with the need to maintain India's attractiveness as a global investment destination.

As foreign fund outflows continue to raise concerns, India's equity taxation framework is likely to remain an important part of the discussion surrounding market competitiveness and long-term economic growth.