Finance Minister says government will consider review of LTCG tax

Finance Minister Nirmala Sitharaman has said the government will consider calls to review the long-term capital gains (LTCG) tax structure on equity investments, including concerns raised by foreign portfolio investors (FPIs). Her remarks come amid sustained overseas selling in Indian equities and renewed debate over whether India’s capital gains tax regime is affecting the competitiveness of its stock market. The Economic Times+1

Speaking at a media event in Mumbai on Monday, November 2, Sitharaman acknowledged that market conditions had changed since 2023-24, when India attracted strong foreign equity inflows under the same tax structure. She said the government recognised the concerns being raised by investors but stopped short of promising any reduction or abolition of LTCG tax. The Economic Times+1

Finance minister acknowledges changing market conditions

Sitharaman said the existing capital gains tax structure had remained unchanged since 2023-24, a period when foreign investment in Indian equities was particularly strong. However, she acknowledged that market conditions had since changed and investor concerns had become louder.

She indicated that the government would consider the representations, while emphasising that economic growth remained a priority.

India needs sustained capital investment to support economic expansion of 7% or more, she said. The finance minister also recognised that equity markets need policy attention, just as the government has focused on developing and deepening the corporate bond market.

However, she cautioned against making tax concessions that could be perceived as favouring foreign investors over domestic participants.

Her position suggests that any potential reform would need to consider the interests of both overseas and Indian investors. The Economic Times+1

Why foreign investors want LTCG tax reviewed

The demand for a review comes amid significant foreign portfolio investor outflows from Indian equities.

According to the figures cited in the Economic Times report, overseas funds had withdrawn a net $30.9 billion from Indian equities during 2026 up to the time of the report. This followed net withdrawals of nearly $19 billion in 2025.

Foreign investors have argued that India’s capital gains tax structure makes its equity market less attractive compared with competing investment destinations.

Another concern is the combination of capital gains tax and Securities Transaction Tax (STT), which increases the overall cost of investing and trading in Indian securities.

Global financial conditions have added to the pressure. US 10-year government bond yields have remained around 5%, making dollar-denominated fixed-income investments more attractive relative to emerging-market assets.

When US yields rise, international investors may demand higher returns from riskier markets or move money towards dollar-based investments. Currency movements can further influence those decisions.

However, taxation is only one factor behind foreign selling. Relative valuations, corporate earnings growth, geopolitical developments, crude oil prices and the strength of the rupee also influence investment decisions. The Economic Times+2

What is the current LTCG tax structure in India?

Under India’s current tax framework, long-term capital gains from qualifying listed equity shares and equity-oriented mutual funds are generally taxed at 12.5% when the gains exceed the annual exemption threshold of ₹1.25 lakh.

For listed equity shares, the investment generally needs to be held for more than 12 months to qualify for long-term capital gains treatment.

Short-term capital gains on qualifying listed equity shares held for up to 12 months are generally taxed at 20%, subject to applicable conditions.

Type of capital gain	Current tax treatment
Long-term gains on qualifying listed equity	12.5%
Annual LTCG exemption	₹1.25 lakh
Short-term gains on qualifying listed equity	20%
Long-term holding period for listed equity	More than 12 months

These rates apply under the relevant provisions of the Income-tax Act, subject to eligibility, applicable surcharge and cess.

The present debate is whether the government should reduce these rates, change the exemption structure or introduce different treatment for foreign portfolio investors.

SBI Research proposes abolishing LTCG tax

The finance minister’s comments have come alongside renewed proposals to change the capital gains tax framework.

SBI Research recently estimated that abolishing LTCG tax could result in a government revenue shortfall of approximately ₹40,000–50,000 crore. It argued that this would be a relatively limited amount compared with the overall size of the Indian economy.

The research unit has also proposed a revised tax structure that would reward investors for holding equity investments for longer periods.

Its suggestions include:

• Increasing the annual equity LTCG exemption from ₹1.25 lakh to ₹2 lakh.
• Reducing the LTCG tax rate to 5% for investments held for two to three years.
• Making qualifying LTCG tax-free for investments held beyond three years.
• Increasing STT rates by 50% to partly compensate for lost capital gains tax revenue.
• Allowing certain mutual fund investors to defer LTCG tax when switching eligible investments within 90 days.

SBI Research estimates that a 50% increase in STT could generate approximately ₹45,000 crore in additional revenue in FY28 under its proposed framework.

These are recommendations from SBI Research. They have not been adopted as government policy. The Economic Times+1

Government is also examining proposals for tax reform

The discussion is not limited to public comments by the finance minister.

A senior government official told Moneycontrol in October that the Centre had received proposals seeking a review of LTCG taxation on equities and was examining them.

The proposals reportedly include changes to the tax treatment of foreign portfolio investors and domestic mutual fund investors.

The Securities and Exchange Board of India (SEBI) has also reportedly suggested removing LTCG tax on equity investments by foreign portfolio investors. Separately, recommendations have been discussed for allowing domestic mutual fund investors to switch between eligible schemes without immediately triggering LTCG tax.

These proposals are part of the wider policy discussion ahead of the Union Budget for FY28, expected in February 2027.

However, the government examining proposals does not mean that it has approved them. Sitharaman has not announced a specific tax reduction, abolition or implementation timeline.

Finance minister says domestic investors must also be considered

One of the most important aspects of Sitharaman’s remarks was her emphasis on maintaining a balance between foreign and domestic investors.

She cautioned against creating a tax framework that could be interpreted as giving preferential treatment to overseas investors at the expense of Indian investors.

Her concern is relevant because domestic mutual funds, insurance companies and individual investors have become increasingly important participants in India’s equity market.

If the government reduces taxes exclusively for foreign investors, domestic market participants could question why similar relief is not available to them.

This creates a policy challenge: India wants to attract international capital, but it also needs a tax framework that treats different categories of investors fairly.

Any reform could therefore involve changes that apply more broadly to equity investments rather than a concession restricted to foreign funds.

What could LTCG tax changes mean for the Indian stock market?

A reduction or abolition of LTCG tax could influence investor behaviour in several ways.

Potentially improved foreign investor participation: Lower taxes could make Indian equities more competitive with other emerging markets, particularly if investors are comparing the post-tax returns available in different countries.

Greater incentive for long-term investment: A lower tax rate for investments held over several years could encourage investors to retain their holdings for longer periods.

Changes in trading activity: If LTCG is reduced while STT is increased, the overall cost of investing would depend on the frequency and size of transactions.

Possible impact on government revenue: The government would need to balance the potential benefits of increased investment against the loss of existing tax collections.

However, tax reform alone may not reverse foreign selling. Investors will continue to evaluate earnings growth, valuations, currency risks and global interest rates before allocating capital to India.

The Bigger Picture

Sitharaman’s remarks bring the LTCG tax debate closer to the upcoming Union Budget, but they do not signal an immediate policy change. The government has acknowledged investor concerns at a time when foreign capital outflows have become substantial and competing markets are attracting greater attention. SBI Research’s proposal to abolish LTCG tax has added a concrete estimate of the potential fiscal cost to the discussion.

The central policy challenge is balancing international competitiveness with fairness for domestic investors and the government’s revenue requirements. Any change will need to consider the combined impact of LTCG, STT, market liquidity and long-term investment behaviour. For now, the government is considering representations, while the existing tax rules remain in force.

Looking Ahead

Investors will watch the government’s Budget consultations and any further announcements from the Finance Ministry ahead of the February 2027 Union Budget. A formal decision could involve a change in the LTCG rate, a higher exemption limit, different treatment for foreign investors or no change at all. Sitharaman has not committed to any particular outcome.

For the Indian stock market, the debate is important because taxation forms part of the broader environment influencing foreign and domestic investment. A more competitive tax structure could support investor sentiment, but sustained foreign inflows will also depend on earnings growth, valuations, currency stability and global financial conditions.