Foreign Investors Returning To India’s Markets Despite Tax Concerns

Foreign investors have largely been net sellers this year, citing economic uncertainty and India’s steep capital gains levies as deterrents.

Despite calls for tax reforms, the Indian government has remained firm on its policy of treating domestic and foreign investors equally.

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Global funds are making a comeback in India’s stock market, despite longstanding concerns over high capital gains taxes. The resurgence follows a world-leading rally in Indian equities, prompting foreign investors to reconsider their stance.

However, fund managers like Carson Block, founder of Muddy Waters Capital LLC, remain critical of the tax regime, arguing that India’s approach differs significantly from competing markets such as China, which offer more favourable conditions for overseas investors, reported Bloomberg.

Last week marked the first net weekly purchase of Indian stocks by global funds in 2025. However, foreign investors have largely been net sellers this year, citing economic uncertainty and India’s steep capital gains levies as deterrents. Industry experts, including Prashant Kothari, a senior investment manager at Pictet Asset Management, stress that lower taxes would make India a more attractive destination for global capital.

“There’s always competition for global capital,” Kothari said, emphasising that tax rates influence investment decisions. A reduction in capital gains tax, he added, would improve India’s appeal to foreign investors.

Policy Stance Unchanged Despite Criticism

Despite calls for tax reforms, the Indian government has remained firm on its policy of treating domestic and foreign investors equally. Consultants suggest there is little indication of a policy shift.

Data compiled by Bloomberg shows that overseas funds have withdrawn around $15 billion from India’s stock market so far this year. However, foreign investors have been more active in the country’s debt market, buoyed by expectations of interest rate cuts and the inclusion of Indian bonds in global indexes in 2024.

Block, known for his short positions on Chinese companies, visited India earlier this year with the intention of launching a fund. However, he pointed out that foreign fund managers need clarity on how capital gains tax will impact their returns. “Obviously, that analysis can get subjective,” he stated in an email to Bloomberg.

Alternative Investment Routes for Foreign Funds

To navigate India’s tax environment, some investors are exploring options such as setting up operations in Gujarat International Finance Tec-City (GIFT City), which offers looser tax rules. However, this requires employing local staff, making it less viable for smaller foreign funds, according to Sunil Badala, head of tax at KPMG in India.

Meanwhile, debt investors have alternative routes to gain exposure to Indian markets without being subject to local taxes. Institutions such as the World Bank, the European Bank for Reconstruction & Development, and the Asian Development Bank have issued rupee-denominated bonds overseas, allowing bond funds to invest without tax complications.

Damien Buchet, chief investment officer at Finisterre Capital, part of Principal Asset Management, highlighted the advantage of these instruments. “When I compare the attractiveness of the Indian local bond trade with the level of complication — I don’t have to own those. I can perfectly replicate that position with some supranational bonds with no tax issues," he said.