Global investors returning to India’s stock market amid its strong rally are having to overlook one major concern—high taxes.
While foreign funds made their first net purchase of Indian stocks in 2025 last week, they have mostly been selling off their holdings this year. Besides economic uncertainty, investors point to India’s tax system, which imposes hefty capital gains taxes on overseas funds. This stands in contrast to countries like China, which have more investor-friendly tax policies.
Carson Block, founder of Muddy Waters Capital, believes India needs to revise its tax strategy to attract foreign capital. Prashant Kothari, an investment manager at Pictet Asset Management, agrees, saying global investors have many options, and India’s high taxes make its market less attractive. Lower tax rates, he suggests, could encourage more investment.
However, India has resisted calls to lower capital gains taxes for foreign investors, insisting on treating domestic and overseas investors equally. The government’s stance remains unchanged, and the 2025 budget—recently approved by the lower house of Parliament—included a further tax increase.
This year, foreign investors have withdrawn about $15 billion from India’s stock market, though they have been more active in the country’s debt market, drawn by expectations of interest rate cuts and the inclusion of Indian bonds in global indexes.
Carson Block, who visited India earlier this year to explore launching a fund, says foreign investors need more predictability in taxation to assess its impact on returns. Some investors can lower their tax burden by setting up operations in Gujarat’s International Financial Services Center, which offers looser tax rules, but that option is not viable for smaller funds due to staffing requirements.
Debt investors have alternatives. Institutions like the World Bank and Asian Development Bank have issued rupee-denominated bonds overseas, allowing funds to gain exposure to Indian debt without local tax obligations.
Damien Buchet of Finisterre Capital says Indian local bonds are appealing, but their tax complexities make them less attractive. Instead, he opts for supranational bonds, which offer similar returns without tax complications.
