Sebi has reportedly asked the government to remove the 12.5% long-term capital gains tax on foreign investors, a move that could reshape sentiment on Dalal Street as the Sensex and Nifty open for trade on Tuesday. Two people with direct knowledge of the matter told Reuters about the recommendation.

The timing is not accidental. Foreign portfolio investors have pulled ₹2.91 lakh crore out of Indian equities in 2026, already well above the ₹1.66 lakh crore withdrawn during all of 2025. October alone saw outflows of ₹34,843 crore, following ₹35,857 crore in September, according to NSDL data.

The Nifty 50 has fallen 10% this year. It is heading for its steepest annual decline since 2011, when the index crashed 24.62%. Domestic mutual funds have cushioned the blow with steady buying. Without that support, the slide would have been deeper.

Sebi has also proposed relief for domestic investors, the report said. Under the suggestion, mutual fund investors would be exempt from LTCG tax when they sell existing holdings to reinvest in new ones. That would let investors rebalance portfolios without losing a slice of their gains to the taxman each time.

Foreign investors currently pay 12.5% LTCG tax on eligible equity investments held for more than 12 months. Gains on holdings of 12 months or less attract a 20% short-term capital gains tax. On top of that, investors pay securities transaction tax on trades and withholding tax on dividends. Sebi has noted that transaction costs in Indian equities are among the highest across jurisdictions.

Finance Minister Nirmala Sitharaman has signalled she is listening. Speaking at the Bloomberg New Economy Forum in New Delhi in mid-October, she said she was keen to hear the debate around securities transaction tax as India looks to attract capital inflows. She declined to comment on specific changes, with the Union Budget due in February. She did call the debate healthy.

Global brokerage Jefferies has outlined three options for the government. The first is cutting both LTCG and STCG rates for all investors. The second is reducing LTCG tax only for foreign portfolio investors. The third is letting FPIs calculate capital gains in US dollar terms, which would offset the damage from currency swings.

The brokerage’s reasoning is simple. India’s LTCG and STCG rates are less competitive than those of several global peers. That adds pressure on foreign investor sentiment and capital flows, and the rupee has felt the strain of persistent selling.

Will the market jump on Tuesday? Nothing is official yet. The recommendation comes from unnamed sources, and the government has not confirmed that it is considering any change. Traders often react to such reports, but the move can fade fast if no policy signal follows. The Budget is still three months away, and a lot can shift before then.

Still, the report gives bulls something to hold on to after a bruising year. A tax cut aimed at foreign investors would not end the selling overnight. Valuations, earnings growth and global interest rates will keep shaping flows. But lower tax friction could make India a more attractive destination at the margin, especially against other Asian markets competing for the same dollars.

Domestic investors may gain too. The proposed exemption on switching mutual fund holdings addresses a long-standing complaint from retail investors, who say tax drag discourages them from moving out of weak funds. If adopted, it could improve portfolio discipline across the mutual fund industry.

For now, Dalal Street will watch for any comment from the finance ministry. Any hint that the proposal has traction could lift banks, financials and large caps, which attract the bulk of foreign money. Silence would leave the market where it has been for most of the year: dependent on domestic flows and waiting for a trigger.