Tax on LTCG for FIIs raised to 12.5%: Budget 2025

Tax on LTCG for FIIs raised to 12.5%: Budget 2025

This increase in the LTCG tax rate for FIIs from 10% to 12.5% u/s 115AD aligns with the broader push toward uniformity in capital gains taxation. Here are some key takeaways:

The Finance Bill, 2025, proposes an amendment to Section 115AD increasing the Income tax rate on LTCG for Foreign Institutional Investors & specified funds from the current 10% to 12.5%. This change object to harmonize tax treatment of LTCG across various sections & aligns rates applicable to non-residents with those for residents. The amendment is set to take effect from April 1, 2026, and will apply to the assessment year 2026-27 and subsequent years.

Previously, the Finance (No. 2) Act, 2024, had raised the tax rate on LTCG u/s 112A—which pertains to listed equity shares, equity-oriented mutual funds, and units of business trusts—to 12.5%. However, LTCG from securities not covered u/s 112A remained taxed at 10% u/s 115AD. The current proposal addresses this discrepancy by uniformly applying a 12.5% tax rate to LTCG from all securities, excluding those referred to in Section 115AB.

Impact on FIIs & FPIs :

Higher Tax Outflows: FIIs investing in Indian markets will now have to factor in an additional 2.5% tax on their long-term capital gains. The increase in tax may slightly impact the net returns of foreign investors. This move ensures parity with residents, following the Finance (No. 2) Act, 2024, which increased LTCG tax u/s 112A to 12.5%.

Broader Taxation Consistenc

• Securities under 115AD (Foreign Institutional Investors) & 112A (Residents) now taxed similarly at 12.5%.
• Short-term capital gains taxation remains unchanged, so FIIs will continue to pay 15% on gains u/s 111A.

Strategic Considerations for Foreign Institutional Investors

• Revisiting Investment Strategies: Investors may reassess long-term holdings & tax efficiency strategies. While not a drastic hike, the change may influence foreign investment flows, depending on overall global tax competitiveness. FIIs from countries with favorable DTAA provisions may still have avenues to mitigate the impact.
• The proposed amendment ensures that LTCG on all other securities (not covered u/s 112A) will now also be taxed at 12.5%, bringing consistency in taxation.
• Would you like a comparative analysis of LTCG tax rates across different countries or potential tax planning strategies for Foreign Institutional Investors.