LTCG tax cut coming? Nirmala Sitharaman's response leaves investors guessing

The Finance Minister has acknowledged calls for a review of equity taxation ahead of Budget 2027, even as Sebi pushes for LTCG relief for foreign investors. But will domestic investors get equal treatment?

In Short

• LTCG taxation is back in focus amid growing investor concerns
• Nirmala Sitharaman responds to the growing debate over LTCG tax
• Pressure mounts on government to revisit tax rules amid FII outflows

“The stakeholders are voicing their concerns louder. I will consider all this,” Finance Minister Nirmala Sitharaman said at a Financial Express event in Mumbai on November 2.

Speaking at a fireside chat, the Finance Minister acknowledged the anxiety among retail investors and equity market participants over taxation and the performance of Indian equities. “I realise the sensitivity and anxiety prevailing among retail investors, especially equity participants, while not being biased either way,” she said.

Her remarks come amid renewed demands for a review of LTCG tax on equities, particularly from foreign portfolio investors (FPIs), who have been pulling money out of Indian markets.

Sitharaman was asked whether the government would roll out the red carpet for foreign investors to encourage dollar inflows into Indian markets.

She cautioned against a policy approach that could create the impression that foreign investors were being given preferential treatment over domestic investors.

“If you pitch for dollar (investors), what about rupee (domestic) investors?” she asked.

She also stopped short of making any immediate commitment on a tax reduction. “So I wouldn't want to say more at this stage, but I recognise the voice,” she said, acknowledging the demand for greater support to the equity market.

WHY INVESTORS WANT LTCG RELIEF?

The debate over capital gains taxation has intensified amid sustained foreign portfolio investor outflows. According to news agency Reuters, foreign investors have sold a record $31 billion worth of Indian stocks in 2026.

Sitharaman pointed out that the capital gains tax structure was broadly unchanged in 2023-24, when India had witnessed strong foreign investment inflows. However, she acknowledged that the circumstances had since changed, with investor concerns becoming louder.

“Equity market also needs support, I recognise that voice,” she said.

She also underlined the need for capital, particularly equity investment, to sustain India's economic growth of 7% or more. While the government has focused on deepening and widening the corporate bond market in recent years, she acknowledged that equity markets also need attention.

SEBI'S TAX PITCH

Sitharaman's remarks come against the backdrop of reported recommendations by the Securities and Exchange Board of India (Sebi) to review the taxation of equity investments.

According to Reuters, Sebi has recommended that the government scrap LTCG tax for foreign equity investors. It has also proposed exempting domestic mutual fund investors from LTCG tax when they switch schemes, provided they have held the existing investment for more than a year.

The proposals are part of Sebi's pre-Budget recommendations and are not binding. The final decision rests with the government.

Under the current tax regime, long-term capital gains on listed equity shares and equity-oriented mutual funds held for more than 12 months are taxed at 12.5% on gains exceeding the annual exemption limit of Rs 1.25 lakh, subject to applicable conditions. Short-term capital gains on such investments are taxed at 20%, where the prescribed Securities Transaction Tax conditions are met.

For investors, the big question now is whether the government's eventual response will extend beyond foreign portfolio investors and mutual fund switches to individuals investing directly in the stock market.

- Ends