Govt Weighs LTCG Tax Cut on Equities Ahead of Budget; Pre-Budget Rollout Likely

• by Akanksha Mishra
• 2026-10-26 17:18:00

In a move that could trigger a fresh rally across Indian equity markets, the central government is actively considering an overhaul of the Long-Term Capital Gains (LTCG) tax structure on equities. High-level discussions are underway within the Ministry of Finance to provide substantial relief to both domestic and foreign portfolio investors, with a formal announcement potentially arriving in the coming weeks ahead of the upcoming Union Budget. According to a Moneycontrol report citing officials familiar with the development, policymakers are reviewing whether adjustments to the current 12.5 percent tax rate—which applies to equity gains without the benefit of indexation—are necessary to enhance the global competitiveness of Indian equities and halt sustained foreign capital outflows.

Global Benchmarking Underway: Internal Deliberations Seek Pre-Budget Resolution

The high-level policy review is evaluating India's capital gains taxation against major financial hubs to ensure parity in investment returns:

Official Confirmation on Impending Action: An official speaking on condition of anonymity confirmed that a decisive move on restructuring is imminent, stating: "A decision on the restructuring is expected soon. The government is reviewing the LTCG tax rate by comparing it with the rates applicable in major economies."

The Current 12.5% Framework: Under existing fiscal norms, an LTCG tax of 12.5 percent is levied on the sale of listed equity shares and equity-oriented mutual fund units held for more than 12 months, applicable to aggregate net gains exceeding ₹1.25 lakh per financial year without indexation benefits. For unlisted equities, no such threshold exemption applies.

Inflation Adjustment Void: Indexation benefits, which historically allowed asset holders to adjust their acquisition costs against annual wholesale or consumer inflation indices, remain absent under the streamlined 12.5% bracket, increasing effective tax liabilities during periods of volatile market consolidation.

Bolstering Foreign Investor Appetite: Restoring Competitiveness on Dalal Street

Policy strategists are prioritizing interventions that can boost institutional capital inflows into domestic secondary markets:

Attracting Institutional Inflows: A senior banking official tracking the consultations noted that internal consensus is building around tax rationalization, adding: "There is an understanding within the government that the tax structure needs to be reviewed to improve the competitiveness of Indian equities and make them more attractive to foreign investors. The government is considering these proposals, including those related to LTCG."

Countering Regional Outflows: Against the backdrop of evolving global central bank interest rate trajectories, elevated tax burdens on equity realizations have drawn criticism from market participants who warn of foreign institutional capital diverting to lower-tax emerging peers.

Timely Pre-Budget Window: Rather than waiting for the formal annual budget presentation, government authorities are examining whether regulatory notifications or structural amendments can be introduced early to reset investment sentiment.

Dollar-Denominated Capital Gains: Significant Relief on the Table for FPIs

Among the most consequential reforms under active evaluation is a structural change to how foreign portfolio investors calculate their taxable profits:

Dollar-Based Profit Computations: Sources confirmed that the finance ministry is assessing whether LTCG paid by overseas institutional funds should be computed on capital gains realized in US dollar terms rather than domestic rupee values.

Eliminating Currency Depreciation Penalty: Currently, foreign investors calculate tax liabilities in rupee terms; this framework means that even if a foreign fund sees its gains eroded in dollar terms due to foreign exchange depreciation, it still owes significant taxes on nominal rupee paper gains.

Catalyst for Overseas Funds: Permitting calculations based on foreign currency returns would remove currency risks from tax equations, providing a direct boost to foreign institutional investment inflows into frontline Indian indices.

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