FPIs Urge Government to Cut STT, Raise Concerns Over Higher Trading Costs

Foreign Portfolio Investors (FPIs) and Indian subsidiaries of global trading firms have urged the Securities and Exchange Board of India (SEBI) and senior government officials to rationalise the Securities Transaction Tax (STT), according to The Economic Times. 

The participants reportedly said that the combination of STT and capital gains tax has increased the tax burden on investors. They also raised concerns that recent Reserve Bank of India (RBI) regulations on broker funding could encourage more trading activity to move through offshore entities. 

FPIs Seek Rationalisation of STT 

According to the report, representatives of FPIs, international trading firms and global custodian banks met officials from SEBI and the Department of Economic Affairs (DEA) on Wednesday. 

During the discussions, market participants reportedly argued that reducing STT would make India's transaction costs more competitive. They also sought a review of capital gains tax, saying the overall tax burden on equity market transactions has increased over the years. 

STT is levied on transactions involving equities, equity derivatives, and equity-oriented mutual funds. It is collected by stock exchanges at the time of trade execution. 

Read More: SEBI Report Shows Over 50% Drop in Options Trading Volumes in FY26 After F&O Reforms 

RBI Leverage Rules Raise Offshore Trading Concerns 

The report said trading firms also highlighted the impact of the RBI's lending norms introduced in April. 

Under the revised framework, banks are not permitted to fund brokers for proprietary trading or investments, and credit extended to brokers must be backed by 100% collateral. 

According to participants quoted in the report, these restrictions could make it more attractive for firms to route certain trades through FPIs operating from overseas jurisdictions, where comparable leverage restrictions do not apply. 

They argued that such a shift could reduce market-making activity and liquidity in domestic markets while lowering tax collections from onshore trading entities. 

Tax Changes and Investor Sentiment 

The discussions come after the government removed interest withholding tax as well as short-term and long-term capital gains tax on government securities (G-Secs) held by FPIs through an ordinance effective April 1, 2026. 

The report also noted that some market participants raised concerns over tax uncertainty following the Supreme Court's ruling involving Tiger Global, which has led foreign investors to reassess the interpretation of tax treaties and indirect transfer rules. 

Conclusion 

According to The Economic Times report, FPIs and global trading firms have urged policymakers to review STT and other transaction-related taxes to improve the competitiveness of India's capital markets. They also expressed concerns that recent RBI leverage norms could result in a greater share of trading activity moving offshore if the current regulatory and tax framework remains unchanged.