New Delhi, Oct. 26 -- The Centre is considering changes to the long-term capital gains (LTCG) tax on equities, including a possible reduction in the current 12.5 per cent rate and a shift to taxing foreign investors on dollar-adjusted gains, as it seeks to revive investor confidence ahead of the Union Budget 2027-28. The government has held discussions with industry representatives, market regulators, tax authorities, banks and other stakeholders on the existing tax framework and its impact on investment flows. A decision on restructuring the levy could come in the coming weeks, although no final decision has been announced.
The review comes amid sustained foreign portfolio investor (FPI) withdrawals and a prolonged period of weak stock market performance. Data from the Central Depository Services Ltd (CDSL) shows that cumulative FPI outflows from Indian equities have reached Rs 3.1 lakh crore so far in 2026, compared with Rs 1.7 lakh crore withdrawn during the whole of 2025.
The government is examining whether the existing tax structure is making Indian equities less competitive compared with other markets. The options under consideration include reducing the LTCG tax rate, removing the levy or changing how gains made by foreign investors are calculated.
At present, long-term gains from listed equities are taxed at 12.5 per cent without indexation, on gains exceeding Rs 1.25 lakh in a financial year. The exemption threshold does not apply to unlisted shares. Indexation, which adjusts an asset's purchase price for inflation when calculating taxable gains, is not available under the current equity LTCG framework.
Foreign investors have also raised concerns about being taxed on gains calculated in rupees rather than dollars. When the rupee depreciates against the US dollar during an investment period, an investor's nominal gains in rupee terms may exceed the actual returns measured in dollars.
For example, an investor buying shares when the dollar is worth Rs 90 and selling them when it reaches Rs 100 could record gains in rupee terms even when currency depreciation reduces the investment's effective dollar-denominated return. Taxing gains on a currency-adjusted basis could better reflect the actual returns received by overseas investors. Many foreign investors do not hedge their currency exposure because of the historically high cost of hedging.
Section 72 of the Income-tax Act, 2025, provides foreign currency conversion relief in certain cases involving non-residents transferring shares or debentures of unlisted Indian companies. However, this relief does not extend to domestic investors and foreign portfolio investors holding listed equities.
India's tax treatment is also being compared with that of other major markets. Foreign investors generally face no capital gains tax on equities in the United States, subject to certain conditions, as well as in the United Kingdom, Singapore, Hong Kong, the United Arab Emirates, Japan and Canada. China exempts some shares while taxing others at 10 per cent. The government is examining how India's rates compare with those in major economies.
The proposed review also comes as retail participation in the domestic stock market has grown sharply since the Covid-19 pandemic, even as recent returns have disappointed investors. Data from Prime Infobase shows that retail investors' shareholding in NSE-listed companies rose from 6.58 per cent, valued at Rs 7.23 lakh crore in March 2020, to 7.66 per cent, worth Rs 33.16 lakh crore in June 2024. By March 2026, it had fallen to 7.12 per cent, valued at Rs 28.97 lakh crore. CDSL demat accounts increased from 2.12 crore in March 2020 to 19.34 crore in September 2026.
The prolonged weakness in stock markets has added to concerns about household sentiment amid limited wage growth in the private sector. The government is also facing questions over how to reconcile India's 7.8 per cent economic growth in April-June with falling stock market indices over the preceding two years.
The debate over LTCG taxation has gained momentum, with the government indicating that it is open to hearing views on possible changes. The Securities Transaction Tax (STT) and tax treatment across asset classes have also featured in discussions about the cost of investing in Indian markets.
The State Bank of India's October 12 Ecowrap report recommended extending the equity holding period to two or three years and abolishing LTCG tax on equities to encourage more stable investment. It also called for predictable policies to attract capital into artificial intelligence, where global competition for investment is intensifying.
Earlier this year, the Centre scrapped withholding tax and long- and short-term capital gains taxes on foreign investments in government bonds to attract overseas funds. Whether similar changes will be extended to equity taxation remains under consideration as the government weighs measures to improve market competitiveness and restore investor confidence.
Published by HT Digital Content Services with permission from Millennium Post.