LTCG Tax on Equities May Be Reviewed by Government

The Indian government may review the long-term capital gains (LTCG) tax on equities in the coming weeks as it explores ways to make the country’s stock market more attractive to domestic and foreign investors ahead of the Union Budget. The proposed review could include changes to the existing tax rate, according to a Moneycontrol report citing sources familiar with the discussions.

The review comes amid substantial foreign portfolio investor (FPI) outflows from Indian equities in 2026. Policymakers are reportedly examining whether the current tax structure affects the competitiveness of Indian stocks compared with markets in other major economies.

According to the report, the government has held discussions with industry representatives, market regulator the Securities and Exchange Board of India (SEBI), the Central Board of Direct Taxes (CBDT), banks and other stakeholders. However, no final decision on changing the LTCG Tax has been announced.

What Is the Current LTCG Tax on Equities?

Under the current framework, long-term capital gains from the sale of listed equities are taxed at 12.5%, without indexation benefits. The tax applies to eligible gains exceeding Rs 1.25 lakh in a financial year, subject to the applicable rules.

The Rs 1.25 lakh threshold provides an annual exemption for qualifying long-term capital gains from listed equity shares and certain equity-oriented investments. Gains above the threshold are taxed at the prescribed rate.

For unlisted shares, the Rs 1.25 lakh exemption limit does not apply in the same way, according to the report. The tax treatment can differ depending on the type of asset, holding period and applicable provisions.

Indexation allows investors to adjust an asset’s purchase cost to account for inflation over the holding period. This adjustment can reduce the taxable gain by increasing the asset’s inflation-adjusted cost. The current LTCG framework for listed equities does not provide this benefit.

Any change to the existing structure could affect how investors calculate their tax liabilities and assess the after-tax returns from investments in Indian equities. The potential impact would depend on the details of any proposal eventually approved by the government.

Why Is the Government Considering an LTCG Tax Review?

The reported review is linked to concerns about the competitiveness of Indian equities and the movement of foreign investment. According to Moneycontrol, the government has held several meetings with market participants and financial institutions to discuss the existing LTCG framework and its potential relationship with capital outflows.

A government official indicated that a decision on restructuring the tax could be taken soon, the report said. A senior banking official familiar with the discussions reportedly said there was recognition within the government that the tax structure needed to be reviewed to improve the attractiveness of Indian equities to foreign investors.

The government is examining proposals related to LTCG taxation, including comparisons with tax regimes in major economies. Such comparisons could help policymakers assess how India’s tax treatment affects the returns investors receive after accounting for taxes.

However, a review does not necessarily mean that the tax rate will be reduced or that the existing framework will be scrapped. The government has not announced the final scope of any proposed changes, and the outcome of the discussions remains uncertain.

Foreign Portfolio Investor Outflows Add to Pressure for a Review

Foreign portfolio investor outflows have become an important part of the debate surrounding India’s equity market. According to data from Central Depository Services Ltd (CDSL) cited in the report, cumulative FPI outflows from Indian equities reached Rs 3.1 lakh crore in 2026 so far.

The reported withdrawals are substantially higher than the Rs 1.7 lakh crore withdrawn during the whole of 2025. The figures highlight the scale of foreign selling and the challenge of maintaining investor participation in the domestic stock market.

Foreign Portfolio Investors can influence market liquidity and share prices through their buying and selling activity. Their investment decisions, however, are shaped by several factors, including relative valuations, expected corporate earnings, global interest rates, currency movements, geopolitical risks and the attractiveness of alternative markets.

The reported tax review is intended to examine whether India’s capital gains framework affects its competitiveness when foreign investors compare investment opportunities across countries. A change in taxation could alter after-tax returns, although it would not necessarily reverse outflows driven by broader market or global economic conditions.

Finance Minister Nirmala Sitharaman Open to Views on LTCG Tax

Finance Minister Nirmala Sitharaman said on October 13 that the government was keen to hear views on the removal of LTCG tax, according to the report.

The statement comes as policymakers consider the wider implications of the existing capital gains framework for investment flows and the attractiveness of Indian equities. Discussions with industry representatives, regulators, banks and other stakeholders are intended to inform the government’s assessment.

However, expressing willingness to hear views on removing the tax does not amount to a decision to abolish it. The government has not formally confirmed whether it will reduce the rate, change the exemption threshold or introduce a different structure.

The distinction is important for investors assessing potential policy changes ahead of the Union Budget. Until an official announcement is made, the existing tax provisions remain applicable.

Could Changes to LTCG Tax Make Indian Equities More Attractive?

A revision to the LTCG tax could influence the after-tax returns investors earn from listed equities. A lower rate or a different exemption structure could improve returns for some investors, depending on their investment size, gains and tax circumstances.

For foreign investors, policymakers are reportedly examining whether India’s tax framework compares favourably with those of other major markets. The aim would be to understand whether changes could improve the appeal of Indian equities as part of international investment portfolios.

Domestic investors could also be affected by any changes to the tax structure. The consequences would depend on whether a proposal applies broadly to listed equity investments or introduces different treatment for specific investor categories or asset classes.

Tax policy is only one factor influencing investment decisions. Corporate earnings, market valuations, economic growth expectations, global financial conditions and investor confidence can also affect capital flows. Any change to LTCG taxation would therefore operate alongside these wider market forces.

What Happens Next?

The government is expected to continue examining the proposals and the feedback received from stakeholders. According to the report, a decision on restructuring the LTCG tax could be taken in the coming weeks, although no official timeline or final proposal has been confirmed.

The Finance Ministry had not responded to an email seeking comment at the time of publication of the report. The report indicated that it would be updated if a response was received.

Investors will be watching for further clarity on whether the government plans to change the 12.5% tax rate, revise the exemption threshold or consider other adjustments to the capital gains framework.

For now, the possibility of a review remains a developing policy issue rather than an announced tax change. Investors should continue to follow the existing rules until the government formally communicates any revisions.