I must admit I was a clown
To be messin' around
But that doesn’t mean
That you 'ave to leave town
Come back
Baby, come back

– Panto Banton, 1994.

A small-scale industry has emerged whose full-time job is to blame the 12.5% long-term capital gains tax on Indian equities for foreign institutional investors selling Indian stocks.

At the forefront are those in the business of managing other people’s money – the OPM wallahs, that is. They have been joined by a few corporate bossmen, the business media and financial influencers, acting as side characters.

Indeed, the argument being offered is a “superficially intuitive” one, which is why it has found the audience that it has. India charges a 12.5% long-term capital gains tax which many other countries don’t, and so the FIIs are selling out of Indian stocks. QED. 

Now, this is not to say that taxes don’t impact investing decisions. They do. But it is important to understand what’s really happening here.

The Real Story
The long-term capital gains tax on equities was reintroduced in April 2018. It was set at 10%. When this happened, the OPM wallahs and the corporates were all busy giving the budget which reintroduced this tax an 11 on 10.

In September 2019, the corporate income tax rate was cut. We didn’t hear any protests then as corporate profits would go up, benefitting both the corporates and the OPM wallahs. This was a 12 out of 10 move by the government, we were told.

In July 2024, the long-term capital gains tax on equities was increased to 12.5%. This was before the stock market peaked in September 2024. The budget increasing this tax received a 12.5 on 10. 

In the February 2025 budget, it was decided that those earning up to ₹1.2 million a year do not need to pay an income tax under the new tax regime. 

In September 2025, the goods and services tax on a whole host of goods was cut from 28% to 18%. This move was welcomed given that it would help fuel private consumption, something that the economy required. 

The point is that every tax cut is welcomed because it helps fuel consumption and corporate profits. Higher corporate profits help stock prices, which benefits the OPM wallahs and the corporates. At the same time budgets that increase taxes are also welcomed. And that is the dichotomy.

The government is committed to making a certain amount of expenditure every year. So, if it does away with one tax, it has to fund expenditure through other sources. 

In 2024-25, the government earned ₹1.29 trillion from the long-term capital gains tax on equities – or 10.5% of the total personal income tax of ₹12.3 trillion collected during the year. This isn’t a small amount by any stretch of imagination. 

Let’s say the government decides to do away with this tax. What will happen then? It has to make up for it from somewhere. If the government introduces a new tax or increases an existing one to make up for the lost revenue, someone, somewhere will have to pay for it. 

Over the years, the long-term capital gains tax has arguably made up for part of the gap created by the slower growth in corporate income-tax collections following the tax rate cut in September 2019. 

If we look at data for listed non-financial, non-government firms compiled by the Reserve Bank of India, net sales grew 57% between 2018-19, before the corporate income tax rate was cut, and 2023-24. Net profits, meanwhile, grew 107%. A good chunk of this faster growth in profits came from the lower corporate tax rate.

Further, India’s informal sector was badly hit due to demonetisation, botched-up implementation of the goods and services tax and the pandemic. This helped the formal sector, which includes firms listed on the stock market.

The higher profits allowed the corporates to pay off a lot of their debt as well. All this was also reflected in higher stock prices, which in turn benefitted the FIIs, India’s investment industry and the OPM wallahs. It led to the rise of financial influencers as well. 

In that sense, it can be argued that yes, FIIs and stock market investors had to pay a tax on their capital gains, but those gains were also higher because of the cut in corporate income tax rates and several other factors in which the government played a part, rightly or wrongly.

Of course, this worked well until 2024. It hasn’t since, after valuations went out of whack. A weaker rupee, rising bond yields in rich countries and the negative impact of the war in West Asia have also made Indian stocks less attractive to foreign investors.

So, why all the hungama now? 
The answer is simple. The stock market hasn’t gone anywhere in the last two years. Meanwhile, most OPM wallahs have continued with their buy, buy, buy discourse.

That discourse and storytelling isn’t really working now. So, they need to blame something. And that something has turned out to be the long-term capital gains tax. Indeed, the OPM wallahs were happy to take the credit when stock prices went up. Now that the market has gone nowhere for two years, they want the government to take the blame.

Corporate promoters also want to ensure that stock prices remain stable. High valuations have allowed them to take some risk off the table by listing their companies at very high prices and selling their existing shares in the secondary market.

From April 2024 to September 2026, the FIIs net sold Indian stocks worth ₹4.8 trillion. The net inflows into equity mutual funds during the same period stood at ₹9.5 trillion. Clearly, equity mutual funds have bought much more than FIIs have sold.

Further, the Employees’ Provident Fund, the National Pension System and insurance schemes have also been buying stocks. 

All buyers require sellers and vice versa. Given this, FIIs aren’t the only ones selling. So are Indian promoters and the venture capitalists and the private equity firms backing many startups. These corporates are also now rather ‘conveniently’ blaming the long-term capital gains tax.

In fact, all through 2025, many OPM wallahs and business TV wallahs kept asking: “If FIIs don’t come to India, where else will they go?” Turns out, they had plenty of places to go. 

So, where does that leave us?
First, the government may decide to do away with the long-term capital gains tax given the mahaul – for lack of a better word – being created by the OPM wallahs and the corporates. But then that money has to come from somewhere else. Either we will pay taxes in some other form or the government will borrow more.

Higher borrowing will mean that the current and future taxpayers will have to pay a higher tax to repay government loans. It could also lead to higher interest rates as the higher government borrowing may leave a lesser amount of money for the private sector and individuals to borrow. All in all, there is no free lunch.

Second, economics and finance are all about second order, third order and nth order effects. Of course, such effects aren’t superficially intuitive and can’t be used to create a mahaul.

So let’s say the government decides to get rid of the long-term capital gains tax on equities. Doing away with a 12.5% tax will make a one-eighth difference to overall gains. Will that be enough to bring FIIs back? Or could it encourage them to sell even more, knowing that the steady flow of SIP and other retail money will help cushion stock prices?

This would allow FIIs to take more money off the table while putting further pressure on the rupee. As of end-September 2026, FIIs still owned Indian stocks worth $689 billion.

Third, social media influencers have been arguing that given that when no one is really making money “why have a tax?” The portfolios of their followers may be bleeding but that doesn’t mean that no one is making money.  

A bulk of FII buying happened before 2021-22. So, they are likely to be making a profit every time they sell. And so are the promoters and venture capitalists selling out.

Fourth, as I have previously argued, one way to slow down FII selling is to discourage the massive domestic flows into stocks. That’s easier said than done.

Fifth, there is another aspect to this debate that the OPM wallahs and corporate bossmen almost never talk about.

Governments have introduced massive cash-transfer programmes, partly because enough jobs are not being created to provide people with adequate and dependable incomes and partly because politicians have understood that it’s easier to win elections this way than actually working towards better social and economic outcomes.

These programmes cost money, and that money has to come from somewhere. Tax revenues help pay for them. If the government gives up revenue from one source, it either has to collect more from somewhere else, borrow more or cut expenditure.

In other words, a tax cut for stock market investors could mean higher taxes for someone else, more government debt or less money for welfare programmes.

Of course, you will rarely see OPM wallahs and corporate bossmen talk about the deeper problems with the Indian economy, including stagnant real incomes for a large chunk of the working population and the economy’s inability to create enough jobs. In their la la land, all is well. 

Indeed, a country and its economy are much more than just the stock market. That’s a simple fact that the incentivised OPM wallahs and corporates refuse to see. 

The argument that a 12.5% tax is driving FIIs away is superficially intuitive. But so is the idea that cutting it will bring them back. The real world, however, doesn't work on superficial intuition. It works through second-order effects, trade-offs and bills that someone, somewhere, eventually has to pay. 

The OPM wallahs can keep singing Baby, come back all they want. But will the FIIs listen?