India Weighs Adjusting Equity Tax Rates
Finance Minister Nirmala Sitharaman has reignited discussions about potential adjustments to long-term capital gains (LTCG) tax and securities transaction tax (STT) as Budget 2027 preparations advance. This dialogue comes amid a significant outflow of ₹3.06 lakh crore by foreign portfolio investors (FPIs) from Indian equities during 2026.
Market participants have shown renewed optimism following Sitharaman’s indication that policymakers are willing to engage with stakeholders regarding possible modifications to LTCG tax and STT structures.
Taxation Structure and Investor Burden
India currently imposes a 12.5% tax on long-term capital gains from listed equities when profits exceed ₹1.25 lakh annually, provided holdings last over 12 months. Short-term capital gains on qualifying equity trades face a 20% levy, alongside an additional transaction-based STT charge.
Puneet Singhania, Director at Master Capital Services, observes that India’s LTCG tax rate falls within international norms rather than creating an extreme outlier. He contrasts India’s approach with jurisdictions like the US, UK, Japan, and Germany—where capital gains taxation varies—while noting that Hong Kong and Singapore impose no such taxes.
The primary investor concern stems from the cumulative impact of transaction and capital gains taxes. STT applies to eligible trades regardless of profitability, while capital gains tax triggers only upon realization of taxable profits.
Market and Investor Reactions
Aditya Agarwala, CIO and Co-Founder of InvestValue Capital, highlights that India’s dual taxation system, combining transaction and capital gains levies, adds financial strain on equity investors. He clarifies, however, that tax policy was not the primary reason behind the ₹3 lakh crore FPI withdrawal this year, attributing the exodus instead to raised US 10-year yields (above 5%), currency weakness, and inflated stock valuations.
CA Kresha Gupta, Director and Fund Manager at Steptrade Capital, argues that a strategic tax overhaul warrants serious examination. A more competitive and transparent tax regime could boost after-tax returns, encourage sustained capital allocation, and strengthen market liquidity, particularly for small and mid-sized enterprises.
Singhania advises against expecting tax relief alone to reverse foreign outflows. When LTCG tax was increased in 2024, some international funds reduced exposure, but asset valuations and global interest rates remained the decisive factors influencing capital movements.
Data from NSDL reveals FPIs pulled a record ₹3.06 lakh crore from Indian equities by October 13, 2026. A more favorable tax environment could enhance the relative appeal of Indian markets, especially for global investors evaluating post-tax performance across jurisdictions.
The current debate follows the Union Budget 2024, which raised LTCG tax on listed equities from 10% to 12.5% and short-term capital gains (STCG) tax from 15% to 20%. Additionally, the government increased STT on derivatives in Budget 2026.
For retail investors, potential tax adjustments would yield varying benefits. Reduced LTCG tax could improve post-tax profits for profitable sales, while lower STT could cut transaction costs. However, the advantages would not be evenly distributed, requiring careful fiscal assessment by authorities.
Singhania points to equity LTCG collections of ₹72,249 crore in FY 2024-25 and ₹1,29,158 crore in FY 2025-26, warning that abolishing LTCG tax would create a significant revenue shortfall.
During the Bloomberg New Economy Forum 2026, Sitharaman acknowledged that capital gains taxation, transaction levies, and asset-class treatment have been widely debated by both domestic and international investors. She stated it was premature to discuss potential changes, as Budget 2027 preparations are underway, but her remarks have reignited speculation about possible reforms to India’s equity tax system.
Evaluating Potential Tax Adjustments
Singhania notes that investors with annual gains below the ₹1.25 lakh exemption threshold would gain limited direct benefit from LTCG abolition. He adds that eliminating the tax would disproportionately favor high-net-worth individuals with substantial taxable profits.
