New Delhi, October 27: The tax on profits from selling shares is not usually a topic that moves Indian politics. This year it might. The government is reportedly considering a cut in the 12.5 per cent long-term capital gains (LTCG) tax on equities, along with a way for foreign investors to calculate taxable gains in dollars, as it prepares the Union Budget 2027-28.

Nothing has been decided. A reduction would need a formal government decision and, almost certainly, a Budget announcement.

Why officials are worried

Officials point to two concerns. The first is that investors have made zero returns, or lost money, over the last two years, and that this comes on top of poor wage growth. For households that turned to equities after the pandemic to build wealth, that has been a big dampener on sentiment.

The second is foreign money, and here the numbers are stark. Foreign portfolio investors (FPIs) have pulled a record Rs 3.08 trillion, about $32.7 billion, out of Indian equities in the first nine months of 2026, according to depository data. That is nearly double the 2025 total, which was itself a record. Selling accelerated in September and has continued in October, and some reports put October’s outflow at around Rs 52,000 crore so far.

The benchmarks have felt it. As of mid-October, the Sensex and Nifty 50 were down roughly 15.6 per cent and 14.4 per cent for the year. The rupee has also weakened sharply, with some reports putting it at around 94 to the dollar, while high crude prices and elevated US bond yields have made Indian equities less attractive to overseas funds.

Strong retail participation has cushioned the market. Domestic investors keep pouring money in through systematic investment plans, which has made it easier for foreign investors to sell in size without crashing prices.

How India got to 12.5 per cent

Equity taxation in India has swung back and forth.

• 2004: Long-term gains on listed shares were exempted, and a securities transaction tax (STT) was introduced instead.

• 2018: The government reintroduced LTCG tax at 10 per cent on gains above Rs 1 lakh, grandfathering earlier gains. Market participants complained that STT was not scrapped in return.
• 2024: The Budget raised the LTCG rate to 12.5 per cent and the short-term rate from 15 to 20 per cent, and lifted the annual exemption to Rs 1.25 lakh.

Today, shares and equity mutual funds held for more than 12 months qualify as long-term, and gains above Rs 1.25 lakh a year are taxed at a flat 12.5 per cent. The rate is the same for foreign and domestic investors. Over two assessment years, the government collected about Rs 2.01 lakh crore from LTCG on equities, so the revenue at stake is large.

The dollar-based idea

The second proposal is aimed squarely at foreign investors. At present, gains are calculated in rupees. When the rupee falls, an overseas investor’s profit in dollar terms can shrink or vanish, yet the tax is still charged on the rupee gain. Calculating gains in dollars would remove that currency penalty. It would probably need changes to the law, and critics may ask why one class of investor should get a special method.

Where the pressure is coming from

State Bank of India’s research arm, in an October 12 Ecowrap report, urged the government to consider abolishing LTCG tax on equities and lengthening the holding period needed to qualify as long-term to two or three years, so that tax relief rewards patient capital and not short-term money.

On October 13, Finance Minister Nirmala Sitharaman said the government would hear proposals on LTCG during Budget consultations, and described a wider debate that includes the securities transaction tax and treating all asset classes uniformly. She announced no change.

That is a shift in tone. Earlier this year, the government said it had no proposal to abolish LTCG on equities for retail and domestic investors.

The trade-offs

For a cut: Supporters argue that taxing profits at a time when many investors have none is poorly timed, that a lower rate could revive retail participation and bring back foreign investors, and that revenue from LTCG is small next to the broader damage from falling confidence.

Against: A cut costs revenue when the government is trying to stay on its fiscal path. Critics say tax changes do little to fix the factors driving returns, such as valuations, earnings, crude prices and global yields, and that gains go mostly to wealthier investors, because retail holdings are concentrated among the better off. It is also unclear that foreign selling is mainly about tax. Many analysts attribute it to rich valuations, the rupee and higher US returns.

Tax policy is also sticky. A change that brings relief this year can be reversed later, as the repeated shifts between 2004 and 2024 show.

What to watch

Whether the finance ministry confirms the plan, what the pre-Budget consultations produce, and whether any cut comes with a longer holding period, as SBI suggested. The Budget is expected on February 1. Foreign flows in November will also show whether the market is reacting to the speculation.

 

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