Finance Minister Nirmala Sitharaman on Tuesday did not rule out changes to the long-term capital gains (LTCG) tax regime. She stated that preparations for the next Union Budget have begun, making it an inappropriate time to discuss specific government considerations.
Speaking at the Bloomberg New Economy Forum in New Delhi, Sitharaman acknowledged ongoing discussions from investors in India and abroad regarding the issue. She also highlighted the securities transaction tax (STT) as a related concern, noting that market participants have raised questions about the uniform treatment of all asset classes. The government, she added, is open to hearing views on these matters.
The remarks come as the government gears up for the Union Budget 2027-28, scheduled for presentation on February 1.
Current LTCG Tax Structure
Under the existing regulations, long-term gains on listed equity shares and equity mutual funds held for over 12 months are taxed at 12.5%. An exemption is provided for gains up to Rs 1.25 lakh annually. These rates were established in the July 2024 Budget, which increased the LTCG rate from 10% and raised the exemption limit from Rs 1 lakh.
The Budget 2026 did not alter the capital gains framework, despite expectations from many investors for a lower rate or a higher exemption. However, it did increase the STT on futures and options trades.
Industry bodies and foreign investors have consistently pointed to India's capital gains tax as a factor impacting equity inflows. Foreign portfolio investors have been net sellers of Indian equities for significant periods this year.
Market Reaction
The BSE Sensex saw a surge of approximately 650 points, and the NSE Nifty 50 approached 22,600 following Sitharaman's comments about the government's willingness to consider feedback on LTCG tax and STT. The rise in benchmark indices suggests that investors interpreted the finance minister's remarks as a strong indication of the government's openness to re-evaluating the tax treatment of equity gains.
Stocks of brokerages, exchanges, and asset management companies are particularly sensitive to any changes in LTCG or STT, as these taxes directly influence trading volumes and investor returns.
For foreign portfolio investors, capital gains tax is a crucial component of return calculations when comparing India with other emerging markets. Any tax relief could enhance the attractiveness of Indian equities at a time when valuations and global capital flows are under scrutiny.
However, Sitharaman offered no firm commitment, and any reduction or elimination of LTCG tax would have significant fiscal implications. Market participants will now await pre-Budget consultations with industry and investor groups in the coming months for more definitive signals before February 1.
