FM Sitharaman reopens LTCG tax debate: Why now, and can the govt afford an overhaul?

Finance Minister Nirmala Sitharaman has indicated that the government is open to reviewing long-term capital gains (LTCG) tax and securities transaction tax (STT) ahead of the next Union Budget, reviving expectations of relief for equity investors at a time when foreign portfolio investors have withdrawn more than Rs 3 lakh crore from Indian stock markets this year.

Speaking at the Bloomberg New Economy Forum in New Delhi on Tuesday, Sitharaman acknowledged growing concerns over the taxation of equity investments and said the government would listen to suggestions from stakeholders. However, she stopped short of promising any reduction or abolition of existing taxes, emphasising the need for caution as preparations for Budget 2027-28 get underway.

The remarks come amid mounting pressure from market participants to rationalise India's equity taxation framework, particularly following increases in capital gains tax rates in 2024 and higher securities transaction taxes on derivatives introduced in 2026. While investors have welcomed the possibility of a review, economists caution that any significant rollback would have substantial implications for government revenue and fiscal consolidation.

𝗙𝗠 𝗼𝗽𝗲𝗻 𝘁𝗼 𝘁𝗮𝘅 𝗿𝗲𝘃𝗶𝗲𝘄

Sitharaman acknowledged that investors had raised questions about the combined burden of LTCG tax and STT, including whether both levies should continue in their present form.

Referring to the discussion surrounding securities transaction tax, she said, "There's a lot of debate," adding that it was healthy to have such discussions and that she would carefully consider the views expressed by stakeholders.

The Finance Minister's comments have been interpreted as an indication that equity taxation could feature in the government's pre-Budget consultations. However, she made no commitment regarding the removal of LTCG tax, reduction in rates or changes to the existing exemption structure.

The debate has gained urgency as India competes with other emerging and developed markets for foreign capital. Investors have argued that higher transaction costs and taxes on investment gains could affect India's relative attractiveness, particularly when global market conditions are already uncertain.

𝗙𝗼𝗿𝗲𝗶𝗴𝗻 𝗼𝘂𝘁𝗳𝗹𝗼𝘄𝘀 𝗿𝗮𝗶𝘀𝗲 𝗰𝗼𝗻𝗰𝗲𝗿𝗻𝘀

Foreign portfolio investor withdrawals have emerged as a major factor behind renewed calls for tax reforms. According to figures cited in a recent SBI Research report, overseas investors sold Indian equities worth Rs 44,166 crore during October up to October 11, taking cumulative withdrawals in 2026 to approximately Rs 3.04 lakh crore.

The outflows have already exceeded the Rs 1.66 lakh crore withdrawn during the whole of 2025, raising questions about the competitiveness of Indian equities and the factors influencing foreign investment decisions.

SBI Research has recommended abolishing LTCG tax on equities while extending the qualifying holding period to two or three years. The proposal is intended to encourage longer-term investment and reduce the impact of volatile capital flows.

However, market experts caution that taxation is only one of several considerations influencing foreign investors. Elevated US bond yields, a stronger dollar, rupee depreciation, high crude oil prices and concerns about corporate earnings and valuations have also contributed to selling pressure.

Analysts maintain that reducing taxes could improve investor sentiment but may not be sufficient to reverse foreign outflows unless broader economic and market conditions become more favourable.

𝗛𝗼𝘄 𝗲𝗾𝘂𝗶𝘁𝘆 𝘁𝗮𝘅𝗲𝘀 𝗵𝗮𝘃𝗲 𝗿𝗶𝘀𝗲𝗻

The current debate follows successive increases in taxes on equity investments and derivatives trading.

In July 2024, the government raised LTCG tax on listed equity shares and eligible equity-oriented mutual funds from 10 per cent to 12.5 per cent. At the same time, the annual exemption threshold was increased from Rs 1 lakh to Rs 1.25 lakh, while short-term capital gains tax on specified equity investments rose from 15 per cent to 20 per cent.

Budget 2026 subsequently increased securities transaction tax on equity derivatives, with the revised rates taking effect from April 1.

STT on futures transactions was raised from 0.02 per cent to 0.05 per cent, while the rate on the sale of options increased from 0.10 per cent to 0.15 per cent. The rate applicable to exercised options also rose from 0.125 per cent to 0.15 per cent.

Unlike capital gains tax, which applies to realised profits, STT is imposed on specified securities transactions irrespective of whether investors make profits or incur losses.

Market participants argue that the combined impact of these taxes increases investment and trading costs, potentially affecting liquidity and returns.

𝗥𝗲𝘃𝗲𝗻𝘂𝗲 𝗹𝗼𝘀𝘀 𝗮 𝗺𝗮𝗷𝗼𝗿 𝗵𝘂𝗿𝗱𝗹𝗲

Despite growing demands for relief, the government faces significant fiscal constraints in considering any major reduction in equity taxes.

According to figures cited by Manoranjan Sharma, Chief Economist at Infomerics Ratings, revenue from equity LTCG tax increased from Rs 72,249 crore in FY24 to approximately Rs 1.29 lakh crore in FY25.

The substantial collections underline the importance of capital gains taxation as a revenue source. Eliminating the levy entirely could create a sizeable gap in government receipts, requiring adjustments through alternative taxes, expenditure reductions or additional borrowing.

The Centre has set a fiscal deficit target of 4.3 per cent of GDP for FY27, leaving limited room for substantial revenue concessions without corresponding adjustments elsewhere.

Sharma said complete abolition appeared less feasible than calibrated relief, particularly given the government's competing expenditure commitments.

The revenue implications of any changes to STT would also need careful consideration. Budgeted STT collections for FY27 stand at Rs 73,700 crore, suggesting that even a moderate reduction could affect receipts.

𝗘𝘅𝗽𝗲𝗿𝘁𝘀 𝗳𝗮𝘃𝗼𝘂𝗿 𝗴𝗿𝗮𝗱𝘂𝗮𝗹 𝗿𝗲𝗹𝗶𝗲𝗳

Market experts have suggested several alternatives to complete abolition of capital gains tax, including lowering STT, reducing the LTCG rate, increasing the annual exemption limit and offering incentives for longer investment holding periods.

Puneet Singhania, Director at Master Capital Services Limited, suggested that a phased reduction in STT could be considered before changes to LTCG tax. He argued that reducing transaction costs could improve liquidity and make Indian markets more competitive.

Navy Vijay Ramavat, Managing Director of Indira Securities, said restoring the earlier 10 per cent LTCG rate was another possible option. However, he cautioned that changes in taxation alone would not necessarily attract sustained foreign inflows.

Experts have also highlighted the importance of simplifying tax compliance, improving reporting mechanisms and providing investors with greater policy predictability.

The challenge for policymakers would be to balance the interests of investors with the need to preserve revenue and maintain fiscal discipline.

𝗠𝗮𝗿𝗸𝗲𝘁𝘀 𝗿𝗮𝗹𝗹𝘆 𝗼𝗻 𝗿𝗲𝗹𝗶𝗲𝗳 𝗵𝗼𝗽𝗲𝘀

Sitharaman's remarks contributed to an improvement in investor sentiment on Tuesday, with benchmark equity indices recording strong gains.

The BSE Sensex surged 1,109 points, or 1.54 per cent, to close at 73,033.78, while the NSE Nifty 50 advanced 358.60 points, or 1.60 per cent, to settle at 22,721.95.

The rally was supported by optimism surrounding a possible review of equity taxation, alongside gains in information technology stocks.

However, analysts warned against interpreting the Finance Minister's remarks as confirmation of an impending tax reduction.

They cautioned that expectations of relief could lead to market disappointment if the government ultimately decides to retain the existing framework.

𝗕𝘂𝗱𝗴𝗲𝘁 𝟮𝟬𝟮𝟳 𝗶𝗻 𝗳𝗼𝗰𝘂𝘀

With preparations for the next Union Budget underway, the debate over capital gains taxation is expected to feature prominently in consultations between the government, financial institutions and market participants.

The central question is whether reducing taxes would significantly improve India's ability to attract foreign investment and encourage long-term domestic participation without undermining fiscal stability.

While SBI Research has advocated complete abolition of equity LTCG tax, other experts favour a more measured approach involving targeted concessions and gradual reductions.

Sitharaman's willingness to hear stakeholders has reopened the discussion, but the government has not announced any proposed amendment to the existing tax structure.

For investors, the next Union Budget will provide greater clarity on whether the renewed debate translates into concrete policy changes or remains part of the government's broader consultation process.