Budget 2025: Tax on long-term capital gains for FIIs raised to 12.5%

The government has proposed an increase in the tax rate on long-term capital gains for non-residents, bringing it to 12.5% from the existing 10%. This change, aimed at aligning tax rates for foreign investors with those applicable to residents, will take effect from April 1, 2026, and apply from the assessment year 2026-27 onward.

Here are the major developments from Union Budget 2025 that matter the most for India Inc and the CFO community. Finance Minister Nirmala Sitharaman presents her eighth union budget.

Currently, under Section 115AD of the Income-tax Act, Foreign Institutional Investors (FIIs) and specified funds are taxed at:
10% on long-term capital gains from the transfer of securities (excluding certain units covered under Section 115AB).
Short-term and other income tax rates remain unchanged.However, the Finance (No. 2) Act, 2024, had already raised the tax on long-term capital gains under Section 112A (which applies to listed equity shares, equity-oriented mutual funds, and units of business trusts) to 12.5%. The proposed amendment ensures that long-term capital gains on all other securities (not covered under Section 112A) will now also be taxed at 12.5%, bringing consistency in taxation.

Impact on foreign investors

With this revision, the government aims to create parity in capital gains taxation between residents and non-residents. While this could marginally increase tax liability for FIIs and other foreign investors, it is unlikely to significantly impact long-term capital flows into Indian markets, experts said.