Amid growing concerns over foreign investment outflows and declining equity markets, Enam Group co-founder Vallabh Bhanshali has called on the Indian government to reconsider the long-term capital gains tax applicable to foreign institutional investors (FIIs). He believes that removing this tax could help improve India's attractiveness as an investment destination and encourage foreign capital to return to domestic markets.
Speaking in an interview, Bhanshali argued that India's tax treatment of foreign investors puts the country at a competitive disadvantage compared with other markets. He maintained that the capital gains tax burden has affected investor sentiment and contributed to the challenges faced by Indian equities in attracting overseas funds.
His remarks come at a time when Indian stock markets are witnessing significant volatility, with foreign portfolio investor (FPI) selling adding to concerns about capital outflows.
Sensex Falls 876 Points as Foreign Investors Continue Selling
The call for tax reforms comes against the backdrop of a sharp decline in the domestic stock market on October 19, 2026. The BSE Sensex fell 876 points to close at 73,853, reflecting continued pressure on investor sentiment.
Foreign investors also remained net sellers in the market, offloading equities worth approximately ₹1,149 crore during the session. The day's selling adds to the broader trend of foreign capital leaving Indian markets in 2026, with cumulative outflows reported at around ₹3 lakh crore.
Persistent selling by overseas investors has raised questions about India's relative attractiveness compared with competing investment destinations. While several factors can influence investment decisions, including global interest rates, currency movements, corporate earnings and geopolitical uncertainty, taxation remains an important consideration when investors compare markets.
Why Is There a Demand to Scrap Capital Gains Tax?
Bhanshali's argument centres on the need to make India more competitive in attracting foreign investment. According to his view, the long-term capital gains tax imposed on foreign institutional investors is an additional burden that could discourage overseas funds from allocating more capital to Indian equities.
Supporters of tax relief argue that a more competitive tax regime could help India attract fresh foreign investment, deepen capital markets and improve liquidity. They also believe that reducing the tax burden could strengthen India's position against other emerging markets competing for global investment flows.
However, the impact of any tax change would depend on several factors. Foreign investors assess not only taxation but also market valuations, economic growth prospects, currency risks, regulatory certainty and expected returns before making investment decisions.
Mohandas Pai Also Backs the Need for Tax Reforms
The demand for a review of capital gains taxation has also received support from other industry voices, including Mohandas Pai, who has called for measures to improve India's investment competitiveness.
Advocates of tax relief believe that the government should examine whether the existing framework discourages foreign capital and consider changes that could improve investor confidence. Some market participants have also called for broader tax relief and a more predictable policy environment to support long-term investment.
The debate highlights a larger policy question: how can India balance its tax revenue requirements with the need to attract global capital and sustain the development of its financial markets?
Will the Government Consider Changes in the Next Budget?
The issue could gain further attention ahead of the next Union Budget, as policymakers evaluate measures to support investment, economic growth and market confidence.
Finance Minister Nirmala Sitharaman has welcomed debate on taxation and economic policy. However, there is no confirmed announcement that the government will scrap or reduce the long-term capital gains tax applicable to foreign investors.
Any change would require a formal government decision and appropriate legislative or budgetary action. Until then, investors and market participants will be watching for indications of the government's approach to capital gains taxation and foreign investment policy.
What Could a Tax Cut Mean for Indian Markets?
If the government were to reduce or remove the relevant capital gains tax, the potential implications could extend beyond foreign institutional investors.
Possible benefits could include:
- Improved investor sentiment: A more competitive tax structure may strengthen India's appeal to overseas investors.
- Higher foreign capital participation: Tax relief could encourage some investors to reconsider their allocations to Indian equities.
- Better market liquidity: Renewed foreign participation may support trading activity and liquidity.
- Greater policy competitiveness: A review could help India assess its tax framework against competing global investment destinations.
However, tax relief alone may not reverse foreign fund outflows. Global monetary conditions, stock valuations, earnings expectations and broader economic developments will continue to influence investor behaviour.
Conclusion
Vallabh Bhanshali's call to scrap long-term capital gains tax on foreign investors has brought the debate over India's investment tax framework back into focus. With the Sensex under pressure and substantial foreign portfolio outflows reported in 2026, industry voices are urging policymakers to consider whether changes in taxation could strengthen India's competitiveness.
Whether the government ultimately opts for a tax reduction, a broader review or no change remains uncertain. For now, the issue is likely to remain part of the wider discussion on attracting foreign capital, improving market confidence and sustaining India's long-term economic growth.
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