New Delhi: Investors who have watched their stock portfolios go sideways for two years may finally have something concrete to hope for. The government is considering a cut in the long-term capital gains (LTCG) tax on equities, sources told news agency ANI on October 27, as part of discussions ahead of the Union Budget 2027-28.
Nothing has been decided yet. But the fact that officials are comparing India’s rate with those in other major economies is itself a shift, after months of market complaints that the tax burden has become too heavy while returns have been thin.
The proposal under consideration is a possible reduction from the current rate of 12.5 per cent, applying to both domestic and foreign investors. Officials are also examining a separate idea for foreign investors: letting them calculate gains in dollar terms rather than in rupees, so currency movements do not inflate or shrink the tax bill.
Why the rethink is happening now
The backdrop is hard to ignore. Foreign portfolio investors have pulled more than Rs 3 lakh crore out of Indian equities so far this calendar year, with more than $4.7 billion leaving in October alone, according to provisional exchange data reported by Reuters.
At home, the sources cited weak or negative market returns over the past two years, sluggish wage growth and rising retail participation. There is also a growing question: can domestic mutual fund inflows keep offsetting foreign outflows indefinitely?
Finance Minister Nirmala Sitharaman added to the speculation on October 13, when she said she was open to suggestions on removing the securities transaction tax (STT), a separate levy charged on stock transactions.
What investors pay today
For listed shares and equity-oriented mutual funds held for more than 12 months, long-term gains above Rs 1.25 lakh in a financial year are taxed at 12.5 per cent, plus surcharge and cess. Gains on holdings sold within 12 months attract short-term capital gains tax at 20 per cent.
Equity LTCG was exempt for years after STT was introduced. In 2018, it was reintroduced at 10 per cent on annual gains above Rs 1 lakh. In July 2024, the rate rose to 12.5 per cent, the exemption rose to Rs 1.25 lakh, and the short-term rate rose from 15 per cent to 20 per cent.
In practice, an investor with a long-term gain of Rs 5 lakh in a year pays tax on Rs 3.75 lakh after the exemption, which is Rs 46,875 at 12.5 per cent before surcharge and cess. A lower rate would leave more of that gain with the investor.
The options on the table
Two ideas have featured prominently in the discussion:
- A lower headline rate: A straightforward reduction from 12.5 per cent, applied equally to domestic and foreign investors.
- Dollar-based computation for foreign investors: Foreign investors buy in dollars but pay tax on rupee gains. When the rupee weakens, the rupee gain looks larger than the dollar gain. Stripping out exchange gains or losses would fix that mismatch.
- A sliding scale: Rohinton Sidhwa, partner at Deloitte India, suggested a rate linked to the holding period, which would encourage investors to stay invested longer.
Business Today reported that India’s regime is seen as less attractive than those of China and South Korea, while Taiwan levies no long-term capital gains tax at all. The sources told ANI that the government is examining the rate against what applies in major economies.
The catch: parity and round-tripping
The government has one major worry. Any relief for foreign investors must sit alongside the treatment of domestic investors, and officials are concerned about tax parity and about round-tripping, where domestic money is routed overseas and brought back as foreign investment to claim a lower rate.
That is why the sources stressed consultations. A final decision, they said, could be taken only after discussions with stakeholders. Business Today reported that sources indicated a decision could come in the Union Budget 2027-28, and that representations seeking a reduction had already been made earlier this year, ahead of the Union Budget 2026-27.
For now, investors should treat the reports as a signal, not a promise. The current rules remain in force, and no rate, exemption limit or effective date has been announced.
FAQs
Has the LTCG tax on equities been cut?
No. As of October 28, the government is only considering a possible reduction, according to sources. No decision has been announced and no new rate has been fixed.
What is the current LTCG tax rate on equities?
Long-term gains on listed shares and equity-oriented mutual funds held for more than 12 months are taxed at 12.5 per cent on gains above Rs 1.25 lakh in a financial year, plus surcharge and cess.
Who would benefit if the rate is cut?
According to the sources, the proposals under consideration would apply to both domestic and foreign investors. A separate dollar-terms computation idea would apply specifically to foreign investors.
When will a decision be taken?
Sources indicated a decision could be taken in the Union Budget 2027-28, after consultations with stakeholders. No timeline has been officially confirmed.
Should investors delay selling shares in hope of a cut?
There is no guarantee of a cut, or of its size or start date. Base tax decisions on investment needs and the rules in force today.
Informeia will track the stakeholder consultations and the Budget announcements and update this story as the position becomes clearer.
