The Indian government is reportedly considering a reduction in the 12.5% long-term capital gains (LTCG) tax on equities as part of preparations for Union Budget 2027–28. The discussions could include a broader restructuring of capital gains taxation, with the aim of improving investor sentiment and making Indian equities more attractive to domestic and foreign investors. No final decision has been announced, and the existing tax rules remain in force.
According to reports published on October 26, 2026, officials are also examining whether foreign portfolio investors (FPIs) should be allowed to calculate capital gains in dollar terms rather than rupees. The debate comes amid prolonged weakness in stock-market returns and significant foreign investor outflows. Any changes would have implications for retail investors, mutual fund investors, overseas institutions and government tax revenue.
Key Takeaways
- Possible tax cut: The Centre is reportedly examining a reduction in the current 12.5% LTCG tax on equities.
- Budget 2027–28: Any potential change could be announced in the next Union Budget, but no official commitment has been made.
- Current exemption: Qualifying long-term gains on listed equities and equity-oriented mutual funds are generally exempt up to ₹1.25 lakh per financial year.
- Foreign investors: The government is reportedly considering dollar-based capital-gains calculations for FPIs.
- Market concerns: Weak equity-market performance and foreign investor outflows have added urgency to the debate.
- Other proposals: SBI Research has advocated abolishing LTCG tax on equities while extending the holding period to encourage longer-term investment.
- No immediate change: Investors should continue following existing tax rules until the government officially announces and implements any revision.
Why Is the Centre Considering an LTCG Tax Cut?
The reported review comes amid concerns about the performance of Indian equities and the country’s ability to attract overseas capital.
According to The Financial Express, government discussions have included lowering or potentially removing the current LTCG tax. The report points to weak stock-market returns over an extended period, subdued wage growth and concerns about foreign investor participation as factors behind the review.
The issue is particularly relevant because millions of Indians have entered the stock market over recent years. Retail participation increased significantly after the COVID-19 pandemic, while demat accounts expanded from 2.12 crore in March 2020 to 19.34 crore in September 2026, according to data cited in the report.
However, a larger investor base does not guarantee higher returns. When markets struggle to generate meaningful gains, taxes on realised profits become a more prominent consideration for investors deciding where and how to allocate capital.
The government is therefore weighing whether changes to the tax structure could improve India’s investment appeal without creating an excessive fiscal cost.
What Is the Current LTCG Tax on Equities?
Under the existing framework, qualifying long-term capital gains from listed equity shares and equity-oriented mutual funds are generally taxed at 12.5% on gains exceeding ₹1.25 lakh in a financial year, subject to the applicable conditions.
The current framework was introduced in the Union Budget 2024–25, when the government increased the LTCG rate from 10% to 12.5% and raised the annual exemption threshold from ₹1 lakh to ₹1.25 lakh.
| Tax provision | Current rule |
|---|---|
| LTCG tax rate on qualifying listed equities | 12.5% |
| Annual exemption threshold | ₹1.25 lakh |
| Applicable gain | Qualifying long-term gains above the threshold |
| Holding period for listed equity shares | Generally more than 12 months |
| Indexation benefit | Not available under the current framework for these gains |
| Status of a proposed reduction | Under reported consideration; not approved |
Source: Income Tax Department.
The ₹1.25 lakh threshold applies to the aggregate of qualifying gains covered by the relevant provisions, rather than providing a separate exemption for every stock or mutual fund. Applicable surcharge, cess and other tax conditions can also affect the final amount payable.
For example, consider an investor who realises ₹2 lakh in qualifying long-term gains during a financial year. Assuming the ₹1.25 lakh threshold is fully available and other relevant conditions are met, ₹75,000 would be taxable at the 12.5% rate before applicable surcharge and cess.
This would produce a basic LTCG tax of ₹9,375. The example illustrates the current framework; it does not reflect any proposed tax cut.
How Could a Lower LTCG Tax Affect Retail Investors?
A reduction in the tax rate would allow investors to retain a larger share of their taxable profits when they sell qualifying investments.
For example, consider ₹5 lakh in qualifying long-term gains, with the ₹1.25 lakh annual exemption available in full.
| Calculation | Current 12.5% rate | Hypothetical 10% rate |
|---|---|---|
| Total qualifying gains | ₹5,00,000 | ₹5,00,000 |
| Exempt amount | ₹1,25,000 | ₹1,25,000 |
| Taxable gains | ₹3,75,000 | ₹3,75,000 |
| Basic LTCG tax | ₹46,875 | ₹37,500 |
| Difference in basic tax | — | ₹9,375 lower |
Illustration only. The 10% rate is hypothetical, not an announced government proposal. Surcharge and cess are excluded.
The potential benefit would depend on the final tax rate, the exemption threshold and the types of investments covered. Investors with no realised qualifying gains would not receive an immediate tax saving from a lower rate.
A reduction could also influence investment decisions. Some investors might be more willing to realise gains, rebalance portfolios or maintain equity exposure if the tax on profits falls. However, market performance depends on corporate earnings, valuations, interest rates, economic growth and global conditions as well as taxation.
A tax cut would not guarantee a stock-market rally or protect investors against losses.
Why Foreign Portfolio Investors Are Part of the Debate
Foreign portfolio investors are another important focus of the reported discussions. These institutions invest in Indian shares and other securities, and their buying and selling activity can influence market liquidity and valuations.
Reports suggest that the government is examining whether the current capital gains framework places Indian equities at a disadvantage compared with some competing markets. Tax treatment differs substantially across jurisdictions, and comparisons depend on the investor’s residency, the type of asset and applicable exemptions.
The Financial Express also reported discussions around allowing FPIs to calculate capital gains in dollar terms rather than rupees. Under the current approach, currency depreciation can increase a foreign investor’s rupee-denominated gain even when the investment’s return measured in dollars is much smaller.
For example, an overseas investor could buy Indian shares and later sell them for a higher rupee value. If the rupee weakens against the dollar during the holding period, the investor’s dollar return could be lower than the rupee gain suggests.
Dollar-based calculations could change the taxable amount for eligible foreign investors, depending on the final design of any rule. The details would matter, including which investors qualify, which securities are covered and how exchange-rate movements are calculated.
What Has the Finance Minister Said?
Finance Minister Nirmala Sitharaman has acknowledged the ongoing debate around capital gains taxation and the securities transaction tax (STT).
At the Bloomberg New Economy Forum in New Delhi earlier in October, she said the government was open to hearing views from domestic and international investors. She also indicated that Budget preparations were underway and did not commit to a specific change.
Separately, a senior government official told Moneycontrol that the Centre had received proposals to review LTCG taxation and was examining them.
These statements establish that the issue is under discussion, but they do not confirm that the government will reduce or abolish the tax. The distinction is important because policy proposals can change during consultations and may not appear in the final Budget.
Investors should therefore avoid treating media reports about possible changes as a reason to make immediate portfolio decisions.
Could the Government Remove LTCG Tax Completely?
A complete removal is one of the ideas raised in the broader policy debate, but it is not an announced government decision.
SBI Research has advocated abolishing LTCG tax on equities and extending the holding period to two or three years to encourage longer-term investment. Other proposals reportedly focus on reducing the existing rate or changing the way foreign investors calculate their gains.
Each option would have different consequences.
A lower rate could reduce the tax burden while retaining some revenue. Abolishing the tax could offer a larger incentive to qualifying investors but would also raise questions about government revenue, fairness across asset classes and whether the change would generate enough additional investment to justify its cost.
Extending the holding period could discourage frequent selling, although it might also reduce flexibility for investors who need to rebalance their portfolios.
The final decision, if any, will depend on the government’s assessment of revenue, market conditions, investment flows and broader tax policy.
The Bigger Picture
The LTCG debate highlights the challenge of balancing tax revenue with the objective of attracting long-term capital. India’s expanding retail investor base has made equity taxation increasingly relevant to household financial planning, while foreign investment flows remain an important consideration for market liquidity and capital formation.
A tax reduction could improve the after-tax returns of investors who realise qualifying gains. But it would not resolve every factor affecting Indian equities, including earnings growth, valuations, currency movements and global interest rates. The impact would also depend on whether investors respond to the change by increasing investment or simply paying less tax on transactions they would have made anyway.
For now, the reported discussions signal a possible policy review rather than a confirmed change. The Union Budget 2027–28 will be the key event to watch for an official decision.
FAQs
1. Is the government cutting the LTCG tax on equities?
No change has been officially announced. Reports on October 26, 2026, say the Centre is considering a reduction or broader restructuring ahead of Budget 2027–28.
2. What is the current LTCG tax rate on Indian equities?
The current rate is generally 12.5% on qualifying long-term gains from listed equity shares and equity-oriented mutual funds exceeding ₹1.25 lakh in a financial year, subject to applicable conditions.
3. When could a tax cut be announced?
If the government decides to make a change, the Union Budget 2027–28 is a potential announcement point. The timing and content of any decision remain uncertain.
4. Could the government abolish LTCG tax completely?
Abolition has been suggested by some market participants and SBI Research, but it is only one option in the policy debate. There is no confirmed decision to eliminate the tax.
5. Would a lower LTCG tax make the stock market rise?
Not necessarily. A lower tax could improve after-tax returns and influence investor behaviour, but share prices also depend on earnings, valuations, interest rates, economic growth and global market conditions.
Looking Ahead
The next major development will be whether the Centre converts the reported discussions into a formal proposal for Budget 2027–28. Investors will need to watch for details on the tax rate, the annual exemption threshold, eligibility rules and any special treatment for foreign portfolio investors. Until an official announcement is made, the existing 12.5% framework remains applicable.
For retail investors, the practical approach is to make investment decisions based on financial goals, risk tolerance and portfolio fundamentals rather than an unconfirmed tax change. If the government revises the rules, the precise provisions and implementation date will determine how the change affects individual investors and the broader market.
Get the day’s top stories in your inbox
One concise email. No spam, unsubscribe anytime.
