LTCG tax removal on the table? FM Sitharaman says Budget consultations will hear investors’ views

Finance Minister Nirmala Sitharaman has indicated that the government will hear investor views on removing the long-term capital gains (LTCG) tax during Budget consultations, bringing equity taxation back into focus as foreign portfolio investors continue to withdraw money from Indian markets.

Speaking at the Bloomberg New Economy Forum in New Delhi on Tuesday, Sitharaman said investors, both Indian and foreign, had raised questions about LTCG tax, the securities transaction tax (STT) and whether different asset classes should receive similar tax treatment.

Her remarks come amid calls for changes to India’s equity taxation regime, including a proposal from SBI Research to abolish LTCG tax on equities and extend the holding period to two or three years to encourage more durable capital inflows.

However, the finance minister’s comments do not amount to an announcement that the government intends to scrap the tax. In a parliamentary reply on July 20, Minister of State for Finance Pankaj Chaudhary said there was no proposal under consideration to abolish LTCG tax for domestic or retail investors.

LTCG tax removal: What did Nirmala Sitharaman say?

Sitharaman acknowledged that the taxation of equity investments had become a subject of discussion among domestic and overseas investors. She said the government was open to hearing different perspectives during the Budget consultation process.

“LTCG, a lot of people are commenting on, both Indian and foreign investors,” she said. “This debate on STT in market and question of treating all asset classes similarly, there is a lot of debate. It is healthy to have this debate.”

The remarks bring two related questions into focus: whether the government should reconsider the tax on long-term equity gains and whether the taxation of different investment products should be aligned more closely.

LTCG tax applies to qualifying capital gains from assets held beyond the prescribed period. STT, by contrast, is levied on specified securities transactions. Any changes to either tax would have implications for investors and the cost of participating in financial markets.

Sitharaman also highlighted the growing role of private capital in emerging industries, including renewable energy and semiconductor manufacturing.

“It is not just AI, but also semiconductors, the semiconductor chips and design and packaging. India is moving into areas which are going to enable AI,” she said.

Will the government abolish LTCG tax for retail investors?

Despite renewed debate over equity taxation, the government has previously ruled out any proposal to abolish LTCG tax for domestic and retail investors.

In a Lok Sabha reply on July 20, Chaudhary said the government was not considering such a move in response to a question about whether removing the tax could improve market sentiment, protect domestic investors and create a level playing field between Indian and foreign investors.

“At present, there is no such proposal under consideration,” Chaudhary said.

He added that tax policies, including capital gains tax rates, were reviewed periodically through the annual Budget process and legislative changes, taking macroeconomic conditions into account.

The LTCG tax rate for domestic and retail investors is 12.5%, the same rate applicable to foreign portfolio investors (FPIs) on returns from equity investments, according to Chaudhary.

The government has, however, introduced a separate tax exemption for FPIs investing in government securities. The measure does not extend to their equity investments.

Why did the government exempt foreign investors from LTCG tax on government securities?

Through the Income-tax (Amendment) Ordinance, 2026, promulgated last month, the government exempted specified investments by FPIs in government securities from income tax on interest and capital gains.

The exemption took effect on April 1, 2026, and applies to interest or capital gains arising to FPIs on or after that date from investments in government securities.

Chaudhary said the change was intended to make India’s tax regime more competitive internationally and attract stable, long-term foreign capital.

The government expects the measure to encourage investment from institutions such as pension funds, insurance companies and sovereign wealth funds. It also brings the tax treatment of government securities closer to that in comparable jurisdictions.

The exemption is limited to government securities and should not be interpreted as a broader removal of LTCG tax on equity investments.

SBI Research calls for scrapping LTCG tax amid FPI outflows

SBI Research has made a stronger case for reform, arguing that abolishing LTCG tax on equities could help attract foreign capital and improve investor sentiment.

In its latest Ecowrap report, the research unit of the State Bank of India called for extending the equity holding period to two or three years while removing LTCG tax on equity investments.

“The Government must seriously look into anchoring hot money flows into the equity segment by extending the holding period to say 2-3 years and abolishing the long-term capital gains tax for equity,” the report stated.

SBI Research argued that monetary and foreign exchange interventions by the Reserve Bank of India alone might not be sufficient to address the challenges facing the rupee. It called for structural measures to make Indian equities more attractive to investors.

The report cited substantial foreign portfolio investor withdrawals from Indian equities, including outflows exceeding ₹2.61 lakh crore in 2026, in addition to ₹1.66 lakh crore recorded in 2025.

“The alarming situation definitely calls for suitable measures to anchor flows of Hot Money in the equity segment ($13 bn outflows in FY27) through both alignment with themes driving allocation as also sweeteners on taxation / cap gains front,” the report said.