India, Nov. 3 -- India's markets regulator has recommended that the government scrap long-term capital gains (LTCG) tax for foreign equity investors, two people with direct knowledge of the matter said, as India looks to galvanise its underachieving equity markets.

The Securities and Exchange Board of India (SEBI) has also proposed tax relief for domestic mutual fund investors, the sources said. They said SEBI suggested that investors be exempt from LTCG when they sell existing holdings to invest in new ones.

The recommendations come months before the annual federal budget in February. They are not binding, and the final decision rests with the government. The sources declined to be named because the recommendations, which have not been...