New Delhi, October 26, 2026: The Union government is examining possible changes to India’s capital gains tax regime ahead of Budget 2027–28, including a reduction in the 12.5% long-term capital gains tax and a proposal that could allow foreign portfolio investors to calculate their taxable gains in US dollar terms rather than rupees.
The discussions come as policymakers look for ways to improve investor sentiment after more than two years of weak stock-market returns, slowing wage growth and continued foreign portfolio outflows.
LTCG Tax Cut Under Discussion
Officials familiar with the discussions said lowering or even removing the long-term capital gains tax is among the options being examined.
A senior government official told The Indian Express that the government is discussing “every option” when asked whether the measures could include changes to capital gains taxation.
Current LTCG Rate Is 12.5%
India currently imposes a 12.5% long-term capital gains tax on qualifying equity gains for both domestic and foreign investors.
Government officials are studying whether reducing this rate could make Indian equities more attractive and improve post-tax returns.
Foreign Investors Could Be Taxed on Dollar Gains
Another major proposal under consideration would change how capital gains are calculated for foreign portfolio investors.
At present, FPIs can end up paying tax on gains measured in rupees even if currency depreciation means their return in dollar terms is significantly lower.
The government is examining whether tax liability should instead reflect the investor’s actual dollar-denominated gain.
Rupee Depreciation Can Create Notional Gains
The issue has become particularly important because a foreign investor’s rupee-denominated profit can look larger after the rupee weakens against the dollar.
For example, an investor may record a gain in rupee terms while earning little or no return after converting the proceeds back into dollars.
Policymakers are therefore considering whether the current system places foreign investors at a disadvantage.
FPIs Currently Excluded From Currency Conversion Relief
The Income-tax Act already provides certain foreign-currency conversion benefits to non-residents when transferring unlisted Indian company shares or debentures.
However, the relief does not currently extend to foreign portfolio investors in listed securities.
The proposed reform could potentially address this gap.
Weak Stock-Market Performance Driving Review
Officials are concerned that Indian equity markets have delivered poor or flat returns over the past two years.
This weakness has come at a time when more middle-class investors are participating directly in stock markets, making market performance increasingly important politically and economically.
Retail Participation Has Surged Since Covid
Retail ownership of NSE-listed companies rose sharply after the pandemic.
According to data cited by The Indian Express, retail holdings increased from 6.58% in March 2020 to 7.66% by June 2024, before declining to 7.12% by March 2026.
The number of CDSL demat accounts also surged from 2.12 crore in March 2020 to 19.34 crore in September 2026.
Domestic Mutual Funds No Longer Fully Offset FPI Outflows
For years, strong domestic mutual-fund inflows helped absorb selling by foreign investors.
Officials are now concerned that this cushion may no longer be sufficient if large FPI outflows continue.
That has increased pressure on the government to improve India’s attractiveness for overseas investors.
Global Investors View 12.5% LTCG as High
Foreign investors reportedly consider India’s 12.5% long-term capital gains tax relatively high compared with several competing markets.
Countries including China, Indonesia and Brazil either impose very low capital gains taxes in comparable situations or offer more favourable treatment.
Other Markets Offer More Competitive Tax Treatment
India is also competing with other emerging markets for global capital.
In an environment where international investors can shift money quickly between countries, tax treatment can influence portfolio-allocation decisions.
The government is therefore studying whether lower taxation could improve India’s relative competitiveness.
AI Investment Also Part of Broader Capital Debate
Officials and analysts have pointed out that India also needs to remain competitive in attracting capital linked to artificial intelligence and advanced technology.
Policy certainty, taxation and market returns are all becoming important factors as global investors decide where to allocate money.
Government Already Gave Relief on Bonds
Earlier in June 2026, the government removed withholding tax as well as long- and short-term capital gains tax on qualifying foreign investments in Indian government bonds.
Before that change, foreign investors could face a 12.5% tax on long-term gains, 30% on short-term gains and around 20% withholding tax on interest income from government securities.
Equity Market Reform Could Follow Bond Changes
The latest discussions suggest that the government could now consider extending some tax relief to equity investments.
However, unlike the government-bond changes, no final decision has been taken.
Any modification would likely be announced as part of the Union Budget or through a separate tax amendment.
SBI Has Suggested Abolishing LTCG on Equity
State Bank of India’s Ecowrap report dated October 12 recommended that the government consider abolishing long-term capital gains tax on equity investments while encouraging foreign investors to remain invested for longer periods.
The report argued that longer holding periods could help anchor foreign capital rather than encourage short-term speculative flows.
Finance Minister Calls LTCG Debate ‘Healthy’
Finance Minister Nirmala Sitharaman recently described the debate around long-term capital gains tax as “healthy” and said she was keen to hear stakeholder views.
She also acknowledged that both domestic and foreign investors regularly raise questions about LTCG and the Securities Transaction Tax.
STT Also Under Market Discussion
Alongside capital gains tax, investors have also raised concerns about the Securities Transaction Tax.
However, the current report does not indicate that the government has reached any decision on reducing or eliminating STT.
Government Wants to Improve Market Sentiment
The broader objective is to revive investor confidence and improve market participation.
Officials are concerned that weak returns, poor private-sector wage growth and continued foreign outflows could weigh on public sentiment despite strong headline economic growth.
No Final Decision Yet
The most important point for investors is that these ideas remain under discussion.
The government has not announced a new LTCG rate, approved dollar-based capital gains taxation or confirmed that either measure will appear in Budget 2027–28.
Budget 2027–28 Will Be Key
The coming Union Budget is therefore likely to be closely watched by domestic and foreign investors.
Any reduction in LTCG tax or change in how FPIs calculate taxable gains could materially affect post-tax returns and influence capital flows into Indian markets.
For now, the proposals remain part of the government’s internal policy discussions as it weighs how best to revive investor sentiment and strengthen India’s appeal to global capital.
Source: The Indian Express, Government officials, State Bank of India Ecowrap
Supreme News Network
