Equity Boost? Govt May Slash LTCG Tax to Revive Market Sentiment
The Indian government may reduce the LTCG tax on equities to boost market sentiment and curb FPI outflows ahead of the Union Budget 2027-28.
In a move that could breathe new life into the stock market, the Indian government is reportedly considering a restructuring of the LTCG tax on equities. According to sources, officials are weighing a potential reduction from the current 12.5 per cent rate as part of the preliminary discussions leading up to the Union Budget 2027-28.
The proposed shift comes at a critical juncture when the market is grappling with weak returns and growing anxiety over the steady outflow of Foreign Portfolio Investors (FPIs). By easing the tax burden, the government aims to restore investor confidence and stabilize the equity landscape.
Attracting Foreign Capital: The Dollar-Term Twist
The government's strategy isn't limited to just lowering percentages. To make the Indian market more attractive to global players, officials are examining a significant policy shift: allowing foreign investors to calculate their capital gains in dollar terms rather than rupee terms for taxation purposes.
This adjustment is specifically designed to mitigate the impact of currency fluctuations and improve the overall sentiment among international investors, who have been withdrawing funds in recent times.
Why the Sudden Shift?
Several economic headwinds have prompted the government to reconsider the current tax regime:
- Weak Market Performance: Market returns have been sluggish or even negative over the last two years.
- Stagnant Wages: Sluggish wage growth has impacted the disposable income of retail investors.
- FPI Outflows: There is a growing concern regarding whether the steady inflow of domestic mutual fund investments is enough to offset the massive exits by foreign investors.
- Global Benchmarking: Sources indicate that the government is currently comparing India's LTCG rates with those of other major global economies to ensure competitiveness.
A History of Shifting Tax Landscapes
The potential change in the LTCG tax on equities is part of a broader, volatile history of equity taxation in India over the last eight years:
The 2018 Reintroduction
Ending a long period of exemption, the government reintroduced the LTCG tax on listed equities in 2018, setting it at 10 per cent for annual gains exceeding Rs 1 lakh.
The 2020 Dividend Shift
The Dividend Distribution Tax (DDT) regime was abolished in 2020. The tax liability was shifted directly to the shareholders, making dividends taxable based on the investor's applicable income tax slab.
The 2024-25 Budget Hikes
The most recent changes occurred in the Union Budget 2024-25, where the Short-Term Capital Gains (STCG) tax was hiked from 15 per cent to 20 per cent. Simultaneously, the LTCG tax was raised from 10 per cent to 12.5 per cent, though the annual exemption limit was increased from Rs 1 lakh to Rs 1.25 lakh.
What Happens Next?
Currently, LTCG on listed equity shares stands at 12.5 per cent without indexation benefits for gains above Rs 1.25 lakh. While Finance Minister Nirmala Sitharaman previously hinted on October 13 that the government is open to stakeholder views regarding the removal of LTCG tax, no official decree has been issued yet.
The government is currently in the process of consulting with various stakeholders to finalize whether these tax reliefs will be implemented to safeguard the Indian equity market ahead of the 2027-28 Budget.