The government is considering lowering the long-term capital gains (LTCG) tax from the current 12.5% and allowing foreign investors to calculate capital gains in dollar terms instead of rupees as part of efforts to improve stock market sentiment, The Indian Express reported.
The proposals are reportedly under discussion ahead of the Union Budget 2027-28. The potential changes would seek to address concerns among domestic and foreign investors amid a prolonged period of subdued stock market performance.
Officials cited two key concerns behind the discussions: weak or negative stock market returns over the past two years and sluggish wage growth, which have weighed on investor sentiment, particularly among the middle class.
Sitharaman Calls LTCG Tax Debate 'healthy'
Earlier this month, Finance Minister Nirmala Sitharaman described the debate surrounding LTCG tax as “healthy” and said she was “keen” to hear different perspectives on the issue.
Speaking at the Bloomberg New Economy forum, Sitharaman said both domestic and foreign investors had raised questions and shared their views on LTCG tax and the Securities Transaction Tax (STT).
The debate on taxation in financial markets and the tax treatment of different asset classes had been widely discussed, she said. Her remarks come amid growing investor scrutiny of India's capital gains tax structure and speculation over possible changes in the upcoming Budget.
Weak Market Returns Weigh on Investor Sentiment
Retail participation in Indian equity markets increased sharply after the Covid-19 pandemic as investors sought to diversify their portfolios and supplement their regular income. Retail investors are generally defined in this context as individuals holding shares worth up to ₹2 lakh.
However, the stock market's lacklustre performance over the past two years, combined with limited wage growth in the private sector, has raised concerns about household investment returns and consumption sentiment.
The report said the government has also faced challenges in explaining strong economic growth alongside weak equity market performance and subdued salary growth.
India recorded economic growth of 7.8% in April-June, according to the report. The government is reportedly exploring measures that could help revive market confidence and improve the investment climate.
“We are discussing every option,” a senior government official told The Indian Express, when asked if measures for stock markets include a reduction or removal of capital gains tax.
Foreign Investors Flag High Capital Gains Tax
Global investors have reportedly expressed concerns that India's 12.5% LTCG tax is relatively high compared with capital gains tax regimes in several other markets. Countries such as China, Indonesia and Brazil have either no capital gains tax or comparatively low levies in certain circumstances.
Foreign investors are also concerned about having to pay tax on gains calculated in rupees rather than dollars. Rupee depreciation can reduce or eliminate their returns when measured in their home currency, even when their investments show gains in rupee terms.
Under Section 72 of the Income-tax Act, 2025, capital gains are generally calculated by deducting eligible transfer expenses, acquisition costs and improvement costs from the full consideration received for a capital asset.
Section 72(6) provides foreign currency conversion relief to non-residents transferring shares or debentures of unlisted Indian companies. The provision seeks to prevent notional gains arising from rupee depreciation from increasing taxable capital gains. However, the relief does not extend to domestic investors or foreign portfolio investors (FPIs) in the same manner for listed equity investments.
Government Previously Eased Bond Investment Taxes
Earlier this year, on June 5, the government removed withholding tax and long- and short-term capital gains taxes on foreign investors' investments in government bonds to attract overseas capital.
Before the changes, foreign investors were subject to a 12.5% tax on long-term capital gains, a 30% tax on short-term capital gains and withholding tax of around 20% on interest income from government bond holdings.
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