- Removing LTCG tax only for FPIs is unfair to domestic investors who supported markets
- Tax relief for FPIs may encourage round-tripping and hawala-like transactions
- Khemani urges rationalising tax by removing either STT or capital gains tax, not both
Removing the long-term capital gains (LTCG) tax only for foreign portfolio investors (FPIs) would be unfair to domestic investors, who have supported Indian equity markets through years of foreign fund outflows, according to Vikas Khemani, Founder of Carnelian Asset Management.
Khemani has called for a rationalisation of India's capital gains tax structure, arguing that domestic savers and investors should not be disadvantaged while the government considers tax relief for foreign investors.
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"Removing LTCG only for FPI is unfair to domestic savers. It's domestic investors who have saved Indian markets for the last 10 years. It is truly a long-term capital," Khemani said.
He also cautioned that offering tax exemptions exclusively to FPIs could encourage round-tripping, where domestic money is routed overseas through unofficial channels and brought back into India through foreign investment structures to benefit from tax advantages.
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"Moreover, it will also start round-tripping and hawala-like transactions, as used to happen earlier when people would send their money abroad through unofficial channels and bring it back through the FPI route to save tax and operate in the markets," he said.
Vikas Khemani On LTCG, STT: 'Both STT And Capital Gains Tax Can't Exist'
Khemani said the government should rationalise the existing tax structure by reconsidering the simultaneous levy of securities transaction tax (STT) and capital gains tax.
"Both STT and capital gains tax can't exist. Remove capital gains tax and keep STT, or do it the other way around. If you are keeping both, then give credit for STT as a tax payment, like TDS," he said.
He also called for simplifying the rules governing the set-off of long-term and short-term capital gains and losses.
Under the current framework, long-term capital losses cannot be set off against short-term capital gains, while restrictions on the adjustment and carry-forward of losses add to the complexity faced by investors.
Khemani said these provisions should be rationalised to make the tax system simpler and more consistent.
Domestic Investors Have Cushioned FII Outflows
Khemani's comments come amid a sharp shift in foreign and domestic institutional flows in Indian equities.
On November 5, foreign institutional investors (FIIs) were net buyers of Indian equities worth Rs 13,801.83 crore, while domestic institutional investors (DIIs) recorded net selling of Rs 10,107.11 crore.
Foreign investors had also made a strong comeback in the preceding four trading sessions between October 30 and November 4, pumping a net Rs 20,834.04 crore into the cash market. This was their strongest four-session net buying since 2023 and the second-highest such buying since February 2021.
DIIs, meanwhile, were net sellers during the same four sessions, offloading shares worth Rs 8,600.79 crore.
However, the broader flow trend highlights the importance of domestic institutional support as Khemani pointed out. DIIs remained net buyers in every month from January to October 2026. Their monthly net purchases included Rs 1.43 lakh crore in March, Rs 89,592 crore in June, Rs 84,966 crore in May and Rs 79,748 crore in September. October saw net buying of Rs 62,220 crore.
FIIs, in contrast, were net sellers in seven of the first 10 months of 2026, including January, March, April, May, June, September and October. March alone saw equity outflows of around Rs 1.23 lakh crore, while October recorded net selling of Rs 45,162 crore.
Foreign investors were net buyers only in February, July and August during this period.
The contrasting flows underline the role domestic institutions have played in absorbing foreign selling pressure and supporting the Indian market.
Khemani's argument is that any proposed tax relief for foreign investors should also account for the contribution made by domestic savers, rather than creating a preferential tax structure for one category of market participants.
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