Finance ministry weighs options on LTCG tax, decision likely in Union Budget 2027 28

Amid heavy selling in domestic equity markets by foreign investors, the Centre is understood to be exploring ways to make the tax regime more attractive, including a reduction in long-term capital gains (LTCG) tax.

According to sources, the Centre is considering several options to make the tax regime for equities more attractive to foreign investors. It is also examining how equity investments are taxed in countries such as South Korea, Taiwan and Brazil. Markets regulator SEBI is understood to have made a presentation on the issue to the finance ministry.

India’s tax regime for equity investments by foreign investors is considered less attractive than those of China and South Korea. Taiwan does not levy long-term capital gains tax but imposes a 0.3% securities transaction tax on the sale of listed securities by individual investors.

Discussions have been under way in the finance ministry for some time. Representations seeking a reduction in long-term capital gains tax for foreign investors were also made earlier this year, ahead of the Union Budget 2026-27.

A key concern for the government, however, is maintaining tax parity between domestic and foreign investors amid worries about the round-tripping of funds. At present, long-term capital gains from the sale of equities are taxed at 12.5%, with an exemption of Rs 1.25 lakh. Short-term capital gains are taxed at 20%, following an increase from 15% in the Union Budget 2023-24.

Securities transaction tax is also levied on the purchase and sale of stocks and other securities on listed exchanges. Finance Minister Nirmala Sitharaman said on October 13 that she was open to suggestions on removing the tax, sparking fresh interest among stock market investors. Foreign portfolio investors have pulled more than Rs 3.04 lakh crore out of Indian equity markets so far this calendar year.

Sources indicated that a decision on long-term capital gains tax could be taken in the Union Budget 2027-28.

Rohinton Sidhwa, Partner, Deloitte India, said: “There is a lot of speculation around possible government moves on long-term capital gains on equity investments by foreign portfolio investors. These centre on two areas—a separate method of computation that exempts exchange gains or losses for foreign investors, or alternatively, a sliding scale of capital gains tax based on the length of the holding period. A sliding scale may be the better option for taxing such investments, as it would encourage a longer-term commitment from investors.”

Foreign investor selling is widely attributed to several factors that have made other markets more attractive. However, market participants have also raised concerns that India’s tax regime is comparatively less competitive.