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A series of tax and policy measures introduced in recent years has enhanced the attractiveness of equity investments in India, creating favourable conditions for sustained domestic inflows into the stock market despite relatively subdued returns over the past two years, according to a report by JP Morgan. 

The global investment bank said recent changes in the taxation of long-term capital gains, debt mutual funds and insurance products have significantly improved the relative appeal of equities, further encouraging the shift of household savings toward financial assets.

JP Morgan noted that equities are currently subject to a 12.5 per cent long-term capital gains tax, while policy changes such as the removal of indexation benefits, taxation of certain insurance policy proceeds and slab-rate taxation for debt mutual funds have altered the risk-reward dynamics in favour of equity investments.

The brokerage said these tax and regulatory changes, combined with rising participation through Systematic Investment Plans (SIPs), are expected to continue supporting a steady flow of domestic money into equity markets.

According to the report, domestic investors have remained resilient even as foreign portfolio investors reduced their exposure to Indian equities during FY25 and FY26. Despite modest returns from benchmark indices during the period, retail investors continued to invest through SIPs, indicating a structural shift in investment behaviour rather than a response to short-term market movements.

JP Morgan said consistent participation by domestic investors has emerged as an important stabilising force for Indian equities, helping offset volatility arising from foreign fund outflows and periods of global risk aversion.

Separately, JPMorgan struck a cautious note on India's information technology sector, saying the industry is likely to face a prolonged period of weak growth as artificial intelligence-led disruption and geopolitical uncertainty continue to weigh on demand.

The brokerage said the sector is facing an uncertain demand environment due to an unprecedented combination of technology and business cycle headwinds, adding that a meaningful recovery in growth remains distant as enterprises continue to reassess their spending priorities.