LTCG Tax Cut: Centre May Reduce 12.5% Equity Levy

The Centre is considering changes to India’s long-term capital gains (LTCG) tax on equities ahead of the Union Budget 2027-28, including a possible reduction in the current 12.5% rate and a change in how capital gains are calculated for Foreign Investors. The discussions aim to improve investor sentiment and make Indian equities more competitive as the country faces sustained foreign portfolio investor (FPI) outflows and subdued stock market returns.

According to a report by The Indian Express, government discussions include lowering the LTCG Tax for domestic and foreign investors and allowing foreign investors to calculate capital gains in dollar terms rather than rupees. These measures are being considered as possible options, but the government has not announced a final decision.

Officials have identified two concerns behind the discussions: weak stock market returns over the past two years, compounded by poor wage growth, and declining confidence that domestic mutual fund inflows can consistently offset large-scale foreign investment withdrawals.

Why the Government Is Considering a Capital Gains Tax Cut

The reported discussions come after more than two years of flat or negative returns across parts of the stock market. Combined with weak wage growth, this has affected investor sentiment, particularly among households that entered the equity market in recent years to diversify their investments and supplement regular income.

Retail participation in India’s stock market increased sharply after the Covid-19 pandemic. However, the value of retail shareholdings in listed companies has declined from its June 2024 peak, raising questions about the experience of newer investors amid market volatility.

A senior government official told The Indian Express that the government was discussing multiple options, including a possible reduction or removal of the capital gains tax on equities.

The reported proposals are part of a broader examination of the tax framework and its effect on investment decisions. Any changes would need to balance the objective of improving market participation with the government’s revenue considerations and wider tax policy priorities.

Two Capital Gains Tax Changes Under Discussion

The discussions reportedly involve two main proposals that could affect how investors are taxed on equity investments.

1. Lowering the Current 12.5% LTCG Tax

The first proposal involves reducing the existing 12.5% long-term capital gains tax on equities, potentially benefiting both domestic and foreign investors. Some market participants believe India’s tax burden on long-term equity gains makes its stock market less competitive compared with certain international markets.

The current tax framework applies to eligible long-term capital gains from listed equities above the applicable annual exemption threshold. A lower rate or a change to the existing structure could improve investors’ post-tax returns, although the actual impact would depend on the details of any policy change.

According to the report, government officials are examining how India’s tax rates compare with those in other major markets. The report cites China, Indonesia and Brazil as examples of countries with different capital gains tax arrangements. However, tax treatment varies across jurisdictions, asset classes and investor categories, making direct comparisons dependent on the specific rules involved.

2. Allowing Foreign Investors to Calculate Gains in Dollar Terms

The second proposal involves allowing foreign investors to calculate capital gains in US dollar terms rather than solely in Indian rupees. The issue arises because exchange-rate movements can increase the rupee value of an investment even when the return measured in dollars is smaller or negative.

For example, a foreign investor may see the rupee value of an investment rise partly because the rupee has weakened against the dollar. If the investment’s dollar value has not increased by the same amount, the investor’s actual return in their home currency may be limited even though a taxable gain arises in rupee terms.

Allowing gains to be calculated in dollar terms could change the tax outcome for foreign investors exposed to currency fluctuations. However, the proposal remains under discussion, and its potential scope and eligibility conditions have not been formally announced.

Retail Investors Increased Their Shareholdings After Covid

Retail participation in Indian equities rose significantly after the Covid-19 pandemic as individuals increasingly turned to the stock market to diversify their savings and seek additional returns.

Data from Prime Infobase cited in the report shows that retail shareholding in companies listed on the National Stock Exchange (NSE) increased from 6.58% in March 2020 to 7.66% in June 2024. The value of those holdings rose from Rs 7.23 lakh crore to Rs 33.16 lakh crore over the same period.

By March 2026, retail shareholding had declined to 7.12%, with its value falling to Rs 28.97 lakh crore.

The figures indicate that retail investors expanded their participation substantially during the post-pandemic market rally, although their shareholding percentage and total value subsequently declined from their 2024 levels.

Participation also increased through the growth of demat accounts. According to the report, the number of demat accounts with Central Depository Services Ltd (CDSL) reached 19.34 crore in September 2026, compared with 2.12 crore in March 2020.

The expansion of investor accounts has made stock market performance more relevant to a broader section of households. Consequently, prolonged periods of weak returns can affect confidence among investors who entered the market during the post-pandemic expansion.

Domestic Mutual Fund Inflows Face a New Challenge

Another concern behind the reported tax review is the changing relationship between domestic investment flows and foreign investor withdrawals.

For much of the period leading up to 2024, domestic mutual funds often treated large FPI exits as opportunities to buy shares. Domestic inflows helped absorb some foreign selling and provided support to the equity market.

However, confidence that domestic mutual fund investments can consistently offset large-scale foreign outflows has weakened, according to the report. This has prompted a broader discussion about how India can attract and retain international capital.

Foreign investors consider multiple factors when allocating funds, including valuations, corporate earnings, economic growth, interest rates, currency movements and the taxation of investment returns. A change in LTCG taxation could affect the after-tax attractiveness of Indian equities, but it would not necessarily reverse outflows driven by other market conditions.

What Does the Income-tax Act, 2025 Say About Capital Gains?

Section 72 of the Income-tax Act, 2025 deals with the computation of capital gains. Under the provision described in the report, taxable gains are calculated using the full consideration received for transferring a capital asset, after deducting eligible transfer expenses, acquisition costs and improvement costs.

Section 72(6) provides foreign currency conversion relief for certain non-residents transferring shares or debentures of unlisted Indian companies. The provision is intended to prevent exchange-rate movements from creating notional gains in specific circumstances.

However, the relief described in the report applies to eligible non-resident investors transferring unlisted Indian company shares or debentures. It does not extend the same treatment to domestic investors or foreign portfolio investors holding listed equities.

This difference is relevant to the current debate because currency movements can influence the rupee value of foreign investors’ equity holdings. The reported proposal to allow dollar-based calculations would require the government to determine how any revised treatment would operate and which categories of investments would qualify.

Global Interest Rates and Market Valuations Affect Foreign Investment

The proposed tax review comes amid several other factors affecting foreign investment in India. The report identifies the lack of a major artificial intelligence investment theme in the Indian market, concerns about valuations despite recent corrections, and rising interest rates in developed economies as factors that may be limiting large-scale FPI inflows.

When interest rates rise in developed markets, investors may find alternative assets more attractive relative to equities in emerging economies. Currency movements and uncertainty about future corporate earnings can also influence decisions about where to allocate international capital.

Market valuations are another consideration. Even after a correction, investors may remain cautious if they believe share prices do not fully reflect future earnings prospects. In this environment, tax policy can become an additional factor in comparisons between investment destinations.

The government is reportedly examining whether changes to capital gains taxation could improve India’s competitive position. However, a tax reduction alone would not address all the factors affecting foreign investor sentiment.

Government Previously Removed Certain Taxes on Foreign Bond Investments

The report also points to a policy change announced earlier in the year. On June 5, the government removed withholding tax and long-term and short-term capital gains taxes on certain foreign investments in government bonds, with the stated objective of attracting overseas funds.

Before the change, foreign investors faced a 12.5% long-term capital gains tax, a 30% short-term capital gains tax and withholding tax of around 20% on interest income from their government bond holdings, according to the report.

The bond-related measures provide context for the current discussion about equity taxation. However, government bonds and listed equities have different risk and return characteristics, and the tax treatment applicable to one asset class does not automatically determine the treatment of another.

The reported equity proposals would therefore represent a separate policy consideration, focused on the competitiveness of the stock market and the tax treatment of capital gains.

SBI Research Calls for Changes to Equity Capital Gains Tax

The State Bank of India’s October 12 Ecowrap research report recommended that the government examine ways to anchor short-term investment flows in equities. The report suggested extending the holding period to two or three years and abolishing the long-term capital gains tax on equity investments.

The recommendation reflects concerns about the stability of investment flows and the role of tax policy in shaping investor behaviour. Longer holding periods can encourage investors to maintain positions for more extended periods, while changes to capital gains taxation could affect the returns earned after tax.

However, the SBI recommendation is a policy suggestion rather than an announced government decision. Whether the Centre adopts any part of the proposal remains uncertain.

Nirmala Sitharaman Says Debate on LTCG Tax Is Healthy

Finance Minister Nirmala Sitharaman said earlier in October that the debate surrounding long-term capital gains taxation was healthy and that she was keen to hear different views.

Speaking at the Bloomberg New Economy event, she noted that both domestic and foreign investors raise questions about LTCG taxation and the Securities Transaction Tax (STT). She also described the broader discussion about taxation in financial markets and the treatment of different asset classes as an established topic of debate.

Her comments indicate that capital gains taxation is part of the wider policy discussion, but they do not confirm that the government has decided to reduce or abolish the existing levy.

Why Policy Predictability Matters for Attracting AI Investment

Soumya Kanti Ghosh, Group Chief Economic Adviser at the State Bank of India, argued in the Ecowrap report that recurring capital outflows should prompt a broader examination of how India positions itself to attract the next wave of global investment.

He highlighted the growing importance of artificial intelligence in shaping expectations about productivity, profitability and technological leadership. According to the report, predictable regulation and policy clarity will become increasingly important as countries compete to attract AI-related capital.

Investment in AI also depends on factors beyond taxation, including computing capacity, reliable electricity supplies and access to skilled workers. A competitive investment environment requires a combination of supportive infrastructure, regulatory certainty and clear long-term policy direction.

The argument adds a wider dimension to the LTCG debate. While equity tax changes could affect the returns investors receive, attracting investment in emerging sectors such as AI also depends on the country’s ability to provide the infrastructure and operating conditions businesses need.

What Happens Next Ahead of Budget 2027-28?

The Centre is reportedly considering several options for capital gains taxation as it prepares for the Union Budget 2027-28. These include a possible reduction in the current 12.5% LTCG tax rate and a change that would allow foreign investors to calculate capital gains in dollar terms.

The government has not confirmed whether either proposal will be adopted. The final outcome could depend on further consultations, the assessment of potential effects on investment flows and the government’s broader fiscal priorities.

Investors will be watching for official announcements on the tax rate, exemption thresholds and the treatment of foreign investors. Until a formal change is notified, the existing provisions continue to apply.

Any eventual reform would need to be assessed in the context of India’s broader efforts to maintain retail investor confidence, attract foreign capital and support long-term investment. Although changes to the LTCG framework could influence post-tax returns, market performance and global economic conditions will remain important determinants of investor behaviour.