LTCG tax revenue reached ₹1.29 trillion in 2024-25, up from ₹72,249 crore the previous year. Ajit Ranade said India should not abandon this tax to support the rupee. He argued that naive expectations of foreign investment cannot replace fair tax policies, as many global factors currently influence capital flows instead.
LTCG tax revenue yielded ₹1.29 trillion in 2024-25, up from ₹72,249 crore the previous year. These collections came both from domestic and foreign investors. Hence, any proposed concession needs a reliable estimate of revenue forgone and evidence of the additional investment it would attract. Naive expectations that foreign money will return cannot substitute for that assessment.
There is also a basic question of fairness. Tax on LTCG is a direct tax similar to that on salaries, profits and interest. Income from rising share prices should contribute to public revenue too. Complete exemption would unfairly favour listed equities over other investments. Moreover, greater dependence on consumption taxes, and tilt toward indirect taxes, places an unfair and relatively heavy burden on poorer households.
What motivates foreign investors? They undoubtedly consider the tax regime. They also compare earnings prospects, valuations, exchange rates and opportunities elsewhere. It is not clear whether an LTCG cut alone can bring them back.
Chief economic advisor V. Anantha Nageswaran has said that the boom in global artificial intelligence (AI) investments is a hurdle in attracting capital, since India is not yet an AI investment destination. Also, risk-free yields have risen globally. Hence, a modest tax concession cannot reliably overcome these issues.
Indian equities remain expensive due to heavy domestic buying. Monthly systematic investment plan contributions have grown to more than ₹32,000 crore. Sustained domestic demand absorbs foreign sales and supports high valuations.
That is another factor influencing overseas investors. However, domestic purchases cannot replace the foreign exchange that leaves the country when foreign investors withdraw. Equity prices and the rupee can, therefore, face different pressures.
Pressure on the rupee has also come from the steep fall in net foreign direct investment (FDI). Despite healthy gross inflows, stronger outflows due to repatriation and Indian companies investing abroad caused net FDI to fall to close to zero in 2024-25.
The policy task is to make domestic opportunities also sufficiently attractive as foreign ones. It is net, not gross inbound investment, that provides external financing, which is crucial to plug the current account deficit. What is left is plugged through a drawdown of reserves.
When portfolio investors withdraw and other inflows prove inadequate, the rupee faces pressure. Expensive imported oil compounds the problem. Persistent inflation above trading partners’ levels can weaken the currency over time. Additionally fiscal expansion, which raises demand without corresponding supplies, can increase imports and inflation. Investors assess these conditions alongside the credibility and predictability of policy. Rupee pressure, thus, has multiple causes.
The proposal to tax foreign investors only on their dollar gains is also problematic. Recall that a foreign investor assumes currency risk voluntarily. It is possible to cover that risk by buying a forward cover. But if an investor chooses to stay unhedged, then that choice should not justify a tax concession when faced with a currency loss. Covering the currency risk of a foreign investor is a burden on the Indian exchequer.
Domestic savers also bear the consequences of depreciation through costlier imports and reduced purchasing power. They have no comparable claim to adjust every taxable receipt for movements in the dollar. Preferential treatment for foreign investors would need a stronger justification than disappointing returns. Further, exemptions reserved only for foreigners could encourage round-tripping, wherein domestic investors send funds overseas and bring them back under a foreign identity.
Greater currency stability requires price stability, credible fiscal management, predictable regulation and attractive domestic investment opportunities. Stability does not mean defending a particular exchange rate regardless of changing economic conditions. The Reserve Bank of India’s sale of reserves helps reduce volatility. But its currency management cannot replace external earnings and investment inflows.
Export earnings provide foreign exchange and cushion against any change in investor preferences. Strengthening exports is a priority, and there have been encouraging signs. Trade agreements also help. Trade policy needs emphasis on competitiveness, which rides on infrastructure, affordable imports and ease of doing business.
Tax policy must provide continuity. Since investors make long-term commitments, repeated changes in rates and holding periods complicate their decisions. Tax concessions can’t be knee-jerk reactions. The issue of securities transactions tax should not be mixed up with LTCG. India needs a stable capital gains regime and a credible response to currency weakness. Sacrificing the former offers no assurance of securing the latter.
The author is senior fellow with Pune International Centre.