News Stocks FPIs will walk away if capital gains tax is raised, warns Helios Capital's Samir AroraFPIs will walk away if capital gains tax is raised, warns Helios Capital's Samir Arora
Helios Capital's Samir Arora warns that foreign portfolio investors may significantly reduce Indian equity allocations if capital gains tax increases, citing existing 15.00% tax disadvantage and rupee depreciation. He argues equity-debt tax parity ignores structural differences, as equity faces multiple taxation levels while debt offers tax deductions. Arora cautions higher equity taxation could disrupt capital formation cycles and warns against abrupt currency movements that damage investor confidence.
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Foreign portfolio investors could sharply reduce allocations to Indian equities if the government raises capital gains tax in the upcoming Budget, Helios Capital founder Samir Arora has warned. He cautioned that higher taxes combined with currency depreciation would make India uncompetitive versus global markets.
Tax Disadvantage Concerns
Arora emphasized the existing challenges faced by foreign investors in Indian markets. "If capital gains tax is increased, FPIs will eventually shut shop," he stated. "You already start with a 15.00 percent tax disadvantage and then add a weakening rupee. Explaining this return math to foreign investors becomes impossible."
| Challenge: | Impact |
|---|---|
| Existing Tax Disadvantage: | 15.00% |
| Currency Depreciation: | Erodes dollar returns |
| Fund Management Fees: | Additional cost burden |
| Global Competition: | Little to no capital gains tax in developed markets |
Foreign investors pay little or no capital gains tax in developed markets, particularly the US, and raising India's rates would widen the relative handicap. Capital gains tax is applied on rupee returns, while currency depreciation erodes dollar returns later, further compressing effective gains for overseas investors.
Equity-Debt Parity Debate
Countering calls from parts of the financial sector to bring equity and debt taxation closer together, Arora argued the comparison ignores structural differences between the two asset classes. In debt instruments, interest paid to investors is deducted as an expense by companies, reducing their taxable income.
"The borrower gets a tax benefit, while the investor pays tax. In equity, when capital gains are earned, there is no corresponding tax deduction on the other side," he explained. Arora pointed out that equity returns face multiple levels of taxation:
- Corporate profits are taxed first
- Dividends are taxed again
- Capital gains are taxed subsequently
"To say equity and debt should be treated the same ignores this entire chain," he noted. He added that copying global taxation models selectively makes little sense, stating that if India wants to match the US system, it should also stop taxing foreign investors.
Capital Formation Impact
Arora cautioned that higher equity taxation could disrupt India's capital formation cycle. Public markets play a crucial role in allowing private equity investors to exit, recycling capital into new ventures and job creation. "When public markets absorb private equity exits, ownership gradually shifts to domestic investors and institutions. That is how Indian companies become widely held," he said.
| Private Equity Reality: | Details |
|---|---|
| Portfolio Returns (Rupees): | 15.00% to 18.00% |
| Comparison: | Similar to public market returns |
| Risk Factor: | Multiple investments go to zero |
He dismissed criticism that private equity exits represent "easy money," noting that people only see successful exits while ignoring dozens of investments that go to zero.
Market Outlook and Currency Concerns
Arora said markets have already corrected sharply, reducing the probability of further large sell-offs unless policy shocks emerge. He warned that signaling future capital gains hikes, even with delayed implementation, would be interpreted negatively.
Sharp daily swings in the rupee were adding to negative market psychology. "Allowing the currency to move abruptly creates panic. Even if depreciation is part of policy, it should be gradual. The current pace damages investor confidence," he said.
Despite near-term volatility, Arora said his firm remains focused on structural growth areas, with top ideas including quick commerce and digital payments or fintech platforms. He reiterated his cautious stance on four-wheeler auto manufacturers but noted that select EV and two-wheeler names remain attractive.
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