India’s Finance Ministry is actively considering adjustments to the long-term capital gains (LTCG) tax regime for equity investments, primarily aimed at making the market more appealing to foreign investors. This move comes amidst substantial selling by foreign portfolio investors (FPIs) in Indian equity markets, which have seen over Rs 3.04 lakh crore pulled out this calendar year.
Sources indicate that the Centre is examining various strategies to enhance the attractiveness of its equity tax framework, including a potential reduction in LTCG tax. Comparative analyses of equity taxation in countries like South Korea, Taiwan, and Brazil are also underway to inform policy decisions. The Securities and Exchange Board of India (SEBI) has reportedly presented its insights on the matter to the Finance Ministry.
Addressing Foreign Fund Outflows and Tax Parity
The current tax regime for foreign equity investments is perceived as less competitive compared to those in nations such as China and South Korea. Taiwan, for instance, does not impose LTCG tax but levies a 0.3% securities transaction tax (STT) on individual investors' sale of listed securities.
A critical challenge for the government is to maintain tax parity between domestic and foreign investors, mitigating concerns about potential round-tripping of funds. Currently, long-term capital gains from equity sales are taxed at 12.5%, with an exemption up to Rs 1.25 lakh. Short-term capital gains (STCG) are taxed at 20%, a rate increased from 15% in the Union Budget 2023-24. Securities transaction tax is also applied to stock purchases and sales on listed exchanges, a tax Finance Minister Nirmala Sitharaman has indicated openness to reviewing.
Expert Insights and Future Outlook
Rohinton Sidhwa, Partner at Deloitte India, highlights ongoing speculation regarding government actions on LTCG tax for foreign portfolio investors. He suggests two main approaches: a separate computation method that exempts exchange gains or losses for foreign investors, or a sliding scale for capital gains tax based on the holding period. Sidhwa believes a sliding scale could be a more effective option, encouraging longer-term commitment from investors.
While several global factors contribute to foreign investor selling, market participants consistently point to India’s comparatively less competitive tax regime as a significant concern. A decision on the LTCG tax is widely anticipated to be announced during the Union Budget 2027-28.