FII Outflows Hit $32.66 Billion: Why an LTCG Tax Cut May Not Be Enough

Foreign investors have recorded $32.66 billion in net outflows from Indian equities in 2026. Jefferies sees banks, Reliance Industries, utilities and real estate as potential beneficiaries of renewed buying. But with October selling still substantial despite two sessions of FII purchases, can a possible LTCG tax cut reverse the trend?

Foreign investors recorded $32.66 billion in net outflows from Indian equities in 2026 through October 28, surpassing the previous full-year record of $18.91 billion set in 2025. The pressure has coincided with a sharp performance gap: the Nifty 50 was down 13.6% in 2026, while the MSCI emerging-markets index had gained 12.4%, according to Reuters’ October 28 report.

Now, a potential cut in India’s long-term capital gains (LTCG) tax has emerged as a possible way to improve foreign investor sentiment. Jefferies believes banks, Reliance Industries, utilities and real estate could benefit if overseas capital returns.

But there is a critical gap between improving sentiment and reversing portfolio outflows. The government has reportedly sought views on capital-market taxation, but no equity LTCG tax cut has been announced. Even if relief arrives, foreign investors will still weigh Indian valuations, earnings prospects, currency risks and returns available in competing markets.

Need to Know

• Record outflows: Foreign investors recorded $32.66 billion in net outflows from Indian equities in 2026, according to Reuters, citing NSDL data.

• Global funds are underweight: 64% of 70 emerging-market funds analysed by Jefferies were underweight India relative to their benchmarks.

• October’s flow gap: NiftyTrader recorded a net FII selling of ₹47,817 crore and net DII buying of ₹61,113 crore through October 28.

• Potential beneficiaries: Jefferies favours banks, Reliance Industries, utilities and real estate if foreign buying recovers.

• Policy uncertainty remains: The government has reportedly sought views on LTCG and securities transaction tax (STT), but the timing and scope of any change are unknown.

Why an LTCG Tax Cut Is Back in Focus

The government has reportedly begun reassessing LTCG and STT as foreign investors continue withdrawing capital from Indian equities.

According to The Economic Times’ October 27 report, officials have sought views from investors, market participants and tax experts on capital-market levies.

The distinction matters: a review is not an approved tax cut. Any decision would need to balance the objective of attracting foreign capital against the potential loss of government revenue.

Under the Income-tax Act, 2025, qualifying long-term capital gains on specified listed-equity investments are generally taxed at 12.5% on eligible gains exceeding ₹1.25 lakh under Section 198. Qualifying short-term capital gains under Section 196 are taxed at 20%, subject to the applicable statutory conditions.

The official provisions are available here: Section 198 — Long-term capital gains and Section 196 — Short-term capital gains.

For FPIs, the policy question is whether changes to capital-gains taxation could make Indian equities more competitive after accounting for transaction costs, currency movements and expected returns.

Jefferies’ Data Reveals How Far Foreign Positioning Has Shifted

Jefferies’ analysis suggests that overseas fund positioning has weakened significantly relative to its historical levels.

Source: The Economic Times’ report on Jefferies’ analysis.

Jefferies also reported net foreign outflows of $21 billion in fiscal 2026 and a further $16.5 billion in fiscal 2027 through October 23. These are fiscal-year figures from the brokerage’s analysis, not the same measurement period as the $32.66 billion calendar-year figure.

The positioning data suggests that some funds could have room to increase their exposure if sentiment improves. However, underweight positioning alone does not guarantee fresh buying. A return of capital would depend on whether global investors become more confident about India’s prospective returns.

Which Stocks Could Benefit if Foreign Buying Returns?

Jefferies identifies banks as its key preference among heavily sold sectors. It also prefers energy, specifically Reliance Industries, as well as utilities and real estate.

The following names are drawn from the companies and sectors discussed in the Economic Times report. They are a watchlist for monitoring foreign-flow changes, not confirmed tax-cut beneficiaries.

The broader high-foreign-holdings list in the report also includes Bharti Airtel, Infosys, Larsen & Toubro, Tata Consultancy Services, Titan, Maruti Suzuki, Apollo Hospitals, Adani Power and Adani Ports.

These classifications should not be mixed. A company’s high foreign shareholding does not establish that it will attract additional buying after a tax change.

Jefferies also prefers large caps over mid caps. The brokerage reported that large caps had outperformed by five percentage points in 2026 and were trading at a 23% valuation discount, compared with a 20% long-term average discount.

This provides another reason to monitor selected large caps if foreign flows recover. However, a valuation discount does not guarantee further outperformance, and any benefit would depend on company fundamentals and investor allocations.

NiftyTrader Data: October Selling Still Outweighs the Recent Buying Signal

NiftyTrader’s FII/DII cash-market data, updated through October 28, provides a useful check on whether foreign investors’ latest purchases have changed the cumulative monthly picture.

NiftyTrader calculation: Domestic institutions’ net buying exceeded net foreign selling by ₹13,296 crore through October 28. DII net buying was approximately 128% of net FII selling in this dataset.

This is a comparison of reported net flows, not evidence that domestic institutions directly bought every share sold by foreign investors.

The daily data shows some improvement: FIIs were net buyers in both sessions on October 27 and 28. But cumulative October net selling remained close to ₹47,817 crore, while domestic institutions continued to provide substantial buying support.

The derivatives picture also calls for caution. NiftyTrader’s participant-wise open-interest data showed FIIs with a net short position of 2,35,042 index-futures contracts on October 28. Net short positioning can reflect bearish exposure or hedging, so it should not automatically be interpreted as a forecast of falling markets.

The combined signal is mixed: recent cash-market buying has returned, but it has not yet established a sustained reversal in monthly flows or a uniformly bullish foreign-investor position.

Three Possible Routes for an LTCG Tax Change

Jefferies has outlined three potential approaches to rationalising equity taxation. None has been confirmed as government policy.

The currency issue is relevant because an Indian investment can generate a rupee-denominated gain while rupee depreciation reduces the investor’s return when measured in dollars.

Jefferies’ dollar-based calculation idea is a proposed policy approach, not an existing general entitlement for FPIs investing in listed Indian equities.

The options involve different trade-offs. Broad relief could affect more investors and government revenues, while targeted relief could focus on foreign portfolio capital. The eventual design, if any, remains uncertain.

The Revenue Question Could Limit the Scope of Relief

Any reduction in equity taxation would have to be weighed against its fiscal consequences.

The Economic Times reported that equity LTCG collections were approximately ₹1.29 lakh crore in FY25, compared with ₹72,249 crore in FY24. Jefferies also put STT collections at an annualised pace of approximately ₹85,000 crore in FY27.

The brokerage estimated that equity LTCG tax and STT together accounted for 8% of direct tax collections and 5% of total gross tax revenue in FY25.

These figures illustrate the trade-off facing policymakers. Lower taxes might improve market competitiveness, but the government would need to consider the revenue impact. The historical collection figures are not estimates of how much a proposed tax cut would cost.

What Would Confirm a Genuine FPI Recovery?

Three developments would provide stronger evidence that the foreign-flow trend is changing: an official announcement clarifying the tax regime, sustained FPI net buying over subsequent sessions, and improving relative performance or earnings prospects.

A short-lived rally following a policy headline would not, by itself, confirm a durable change in foreign allocations.

For stocks, banks remain the clearest sector to monitor under Jefferies’ stated preference, followed by Reliance Industries, utilities and real estate. Individual stock performance would still depend on valuations, earnings and the scale of actual foreign buying.

Readers can track subsequent institutional flows through NiftyTrader’s FII/DII data page.

Bottom Line

A potential LTCG tax cut could improve foreign investor sentiment and support selected large-cap stocks. Jefferies’ preferences point towards banks, Reliance Industries, utilities and real estate if overseas buying recovers.

But record net outflows, weak relative market performance and the gap between recent daily purchases and cumulative October selling suggest that tax relief alone may not be enough. The government also faces a revenue trade-off, while foreign investors still need reasons to expect competitive returns from Indian equities.

Until a tax change is formally announced and followed by sustained buying, the potential benefits for individual stocks remain conditional. The more convincing signal would be a combination of policy clarity, better relative performance and a measurable recovery in FPI flows.

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Disclaimer: This article is for informational and educational purposes only. The stocks discussed reflect reported brokerage preferences or foreign-holding data and are not guaranteed beneficiaries of a tax change. Investors should independently assess fundamentals, valuations and risks before making financial decisions.