A string of tax and policy reforms introduced over recent years has significantly improved the relative attractiveness of equity investments in India, creating conditions for sustained domestic inflows into stock markets even as benchmark returns have remained subdued over the past two years, according to a report by JP Morgan.

How Tax Changes Tipped the Scales Toward Equities

The global investment bank highlighted that equities are currently taxed at a 12.5 per cent long-term capital gains (LTCG) rate — a level that, when compared with recent policy shifts affecting competing asset classes, now looks relatively competitive. Notably, the removal of indexation benefits on debt instruments, slab-rate taxation applied to debt mutual funds, and the taxation of proceeds from certain insurance policies have collectively altered the risk-reward calculus in favour of equities.

These changes, JP Morgan argued, have structurally nudged household savings away from traditional fixed-income and insurance products toward financial market participation — a rebalancing that analysts say could have lasting implications for domestic capital formation.

SIP Resilience Signals a Structural Shift

Beyond tax incentives, JP Morgan pointed to the sustained growth of Systematic Investment Plans (SIPs) as evidence of a deeper behavioural change among retail investors. According to the report, domestic investors maintained their SIP commitments through FY25 and FY26 even as foreign portfolio investors (FPIs) trimmed their exposure to Indian equities during the same period.

The brokerage described this as a structural shift in investment behaviour rather than a short-term market response — a sign that retail participation is increasingly decoupled from near-term index performance. This consistent domestic participation, JP Morgan said, has emerged as a meaningful stabilising force for Indian equities, helping cushion the impact of FPI outflows and episodes of global risk aversion.

IT Sector Faces Prolonged Headwinds, JP Morgan Warns

In a separate assessment, JP Morgan struck a cautious note on India's information technology sector, warning that the industry faces a prolonged period of weak growth. The brokerage cited an 'unprecedented combination' of technology and business cycle headwinds — specifically, disruption driven by artificial intelligence (AI) and persistent geopolitical uncertainty — as the primary drags on demand.

JP Morgan said enterprises are continuing to reassess their technology spending priorities, and that a meaningful recovery in IT sector growth remains distant. The assessment adds to a growing body of caution around Indian IT's near-term earnings outlook, particularly given the sector's heavy dependence on US discretionary technology budgets.

What This Means for Indian Markets

Taken together, JP Morgan's analysis presents a nuanced picture: domestic equity flows are on a structurally stronger footing than at any point in the past decade, yet sectoral risks — especially in IT — remain elevated. This comes amid a broader global recalibration of technology spending and continued uncertainty around US monetary policy.

Whether domestic inflows can fully offset the drag from FPI caution and a weakening IT earnings cycle will likely be a defining question for Indian equity markets through the remainder of FY26.