Amid persistent foreign fund outflows, Madhavi Arora, chief economist at Emkay Global Financial Services, suggests rationalizing the effective transaction-tax burden rather than tweaking headline long-term capital gains (LTCG) rates. While she notes that a reversal of the global AI trade could improve India’s relative attractiveness, that alone won’t trigger a sustained return of foreign capital—just as new free-trade agreements (FTAs) can help cushion – but not fully offset – external demand shocks. Edited excerpts:
I would rationalize the effective transaction-tax burden rather than make another large change to the headline LTCG rate. Listed-equity LTCG is currently taxed at 12.5% on annual gains above ₹1.25 lakh, while delivery-based equity transactions also attract STT (securities transaction tax) of 0.1% on both the purchase and sale legs. The problem is, therefore, not simply the level of capital gains taxation, but the layering of a transaction tax on top of a capital gains regime.
STT was introduced in an era when listed-equity LTCG was exempt, whereas India today has both STT and LTCG tax. A calibrated reduction in STT, particularly for cash-market transactions, would lower friction, improve market liquidity and send a useful signal to global investors, without reopening the entire capital gains framework.
A reversal of the global AI trade would certainly improve India’s relative attractiveness, but I don't think it would be sufficient by itself to trigger a sustained return of foreign capital. India's ‘anti-AI’ label largely reflects the composition of its benchmark indices: financials account for roughly 36% of the Nifty, while direct exposure to the semiconductor and AI-hardware cycle is relatively limited. There are several ‘AI-enabler’ stocks in India which have seen spectacular returns over the past 12 months or so.
If the AI trade unwinds, some global capital could rotate back towards India. There is already evidence that periods of weakness in AI-heavy Asian markets have coincided with renewed foreign buying of Indian equities. But a durable return of foreign investors ultimately requires more than an AI correction. The relative valuation of India, earnings, the dollar and US yields, oil prices and domestic policy, all matter.