Centre weighs long-term capital gains tax changes amid foreign investor selling

Proposed changes could arrive before Union Budget, with officials comparing tax rates globally and examining dollar-based calculations for overseas investors

The Centre is considering restructuring the long-term capital gains (LTCG) tax on equities held by domestic and foreign investors, amid subdued market returns and sustained selling by foreign portfolio investors (FPIs).

A decision on the proposed changes could come before the Union Budget, according to a Moneycontrol report citing government sources.

The government is examining India's LTCG tax rates against those prevailing in major economies, the report said, as policymakers look to assess the impact of taxation on capital flows and investor sentiment.

India currently levies LTCG tax at 12.5 per cent on gains from the sale of listed equities exceeding ₹1.25 lakh in a financial year. The tax applies to both domestic and foreign investors, without indexation benefits. Gains from the sale of unlisted shares are also taxed at 12.5 per cent, but without the annual exemption threshold applicable to listed equities.

The Centre has held several rounds of consultations with industry representatives, the Securities and Exchange Board of India (Sebi), the Central Board of Direct Taxes (CBDT), banks and other stakeholders to examine the existing framework and its implications for capital flows, the sources said.

The review comes against the backdrop of heavy foreign investor selling. Cumulative FPI outflows from Indian equities have reached ₹3.1 lakh crore so far in 2026, substantially exceeding the ₹1.7 lakh crore withdrawn during the whole of 2025, according to data from Central Depository Services Ltd (CDSL).

"The government must seriously look into anchoring hot money flows into the equity segment by extending the holding period to say 2-3 years and abolishing the long-term capital gains tax for equity," SBI Research said in a report.

Equity capital gains are exempt from tax for foreign investors under certain conditions in markets such as the US, the UK, Singapore, Hong Kong, the UAE and Japan. In China, some categories of shares are exempt, while others attract a 10 per cent tax.

Finance minister Nirmala Sitharaman said on October 13 that the government was keen to hear views on removing LTCG tax. Earlier this year, the Centre exempted foreign investors from capital gains tax on the redemption of government securities under a separate measure to attract overseas investment.

The government is also examining whether capital gains earned by foreign investors should be calculated in dollar terms instead of rupees. Currency depreciation can inflate gains in rupee terms even when dollar-denominated returns are considerably lower.

Market observers said any tax relief would need to be weighed against its potential impact on government revenues.