Government Seeks Investor And Tax Expert Views On LTCG Tax Rate And STT As Foreign Investors Pull Out Of Indian Equities

The government has sought feedback from investors, market participants and tax experts on the long-term capital gains (LTCG) tax rate and securities transaction tax (STT), as it reviews capital market levies ahead of Budget 2027. The exercise comes amid sustained foreign investor outflows and calls to reduce the tax burden on equity investments.

People familiar with the development said the government wants to understand stakeholder concerns and examine possible changes. Any decision will have to account for the impact on tax revenue, particularly as the West Asia conflict pushes up fertiliser subsidy costs and the government continues to fund large social sector programmes.

Finance Minister Addresses The Issue

Finance Minister Nirmala Sitharaman addressed the issue at an event in New Delhi on 13 October. She said discussions on the levies were underway but cautioned that she could not indicate what the upcoming Budget would consider. She also noted that investors in India and overseas had raised the matter in their conversations with her.

The minister's remarks triggered a rise in stocks. However, the Indian stock market has lost $924 billion in market capitalisation since its September 2024 peak.

LTCG Collections Nearly Double In FY25

The government collected ₹1.29 lakh crore in LTCG tax in FY25, nearly twice the ₹72,249 crore collected in FY24. STT collections stood at ₹57,522 crore in FY26. Collections rose 52% year-on-year to ₹46,840 crore between 1 April and 14 October.

Currently, the LTCG tax rate on listed equities held for more than 12 months stands at 12.5% for domestic investors and foreign portfolio investors (FPIs). Including cess and surcharges, the effective rate comes to nearly 15%.

Investors also pay STT at 0.1% on both the purchase and sale of equity transactions, along with stamp duty of 0.015% on the buyer. Market participants have questioned the simultaneous levy of LTCG tax and STT, arguing that it increases the cost of investing in Indian equities. Note that the short-term capital gains tax or STCG tax rate on listed equity shares for a holding period of 12 months or less is 20%.

Experts Call For A Review Of Capital Market Levies

Experts feel that India needs to assess its tax competitiveness against markets such as the US, UK, Singapore, Hong Kong, South Korea and Taiwan, where non-residents generally do not pay capital gains tax on securities traded in those jurisdictions.

They opine that exempting FPIs from capital gains tax while adjusting STT could make the change revenue-neutral. According to them, this could reduce transaction-level friction for overseas investors while discouraging high-frequency trading by some FPIs.

They also called for a broader review of the tax burden on FPIs stressing the need for greater tax certainty following the Supreme Court's January ruling in the Tiger Global case, which held that gains from the firm's $1.6 billion sale of its Flipkart stake to Walmart were taxable in India.

Industry watchers feel that Budget 2027 offers an opportunity to review the taxation of listed equities as foreign flows face pressure from high global interest rates, competing markets and currency volatility.

Also Read - Tata Motors Moves Closer To Iveco Acquisition As Shareholder Acceptance Crosses 80%, With Final Results Due on 29 October