India is considering a possible review of the 12.5% long-term capital gains (LTCG) tax on equity investments as the government looks for ways to address sustained foreign investor outflows and improve the attractiveness of Indian stock markets.
According to reports published on October 26, 2026, the Finance Ministry has held discussions with the Securities and Exchange Board of India (SEBI), tax authorities, banks and industry representatives on the existing capital gains tax framework. The proposals reportedly include reducing the LTCG tax rate and allowing foreign portfolio investors (FPIs) to calculate capital gains in US dollar terms instead of Indian rupees. No final decision has been announced.
Why Is the Government Reviewing Equity Capital Gains Tax?
The reported discussions come against the backdrop of significant foreign investment withdrawals, subdued stock market performance and concerns about the competitiveness of Indian equities.
Foreign investors have been reducing their exposure to Indian shares amid a combination of market valuation concerns, global investment opportunities and currency depreciation. The rupee's weakness against the US dollar has added another layer to the returns earned by overseas investors.
According to data cited by Moneycontrol, cumulative foreign portfolio investor outflows from Indian equities reached approximately ₹3.1 lakh crore in 2026 as of October 26. This exceeded the ₹1.7 lakh crore withdrawn during the whole of 2025.
The government is reportedly examining whether changes to the taxation framework could improve investor sentiment and encourage greater participation in Indian equity markets.
What Is the Current LTCG Tax Rate on Equities?
Under the current tax framework, long-term capital gains from specified listed equity shares, equity-oriented mutual fund units and business trust units are generally taxed at 12.5% without indexation, subject to the applicable conditions.
For eligible listed equity investments covered by Section 112A of the Income-tax Act, 1961, the rate applies to aggregate qualifying gains exceeding ₹1.25 lakh in a financial year. The higher rate and revised exemption threshold were introduced through the Finance (No. 2) Act, 2024, with effect from July 23, 2024.
The existing framework applies to both domestic investors and foreign portfolio investors for the relevant category of equity gains.
Dollar-Based Capital Gains Calculation for Foreign Investors
One of the reported proposals involves allowing foreign portfolio investors to calculate their capital gains in US dollar terms rather than solely in Indian rupees.
Under the current approach, gains are generally calculated using rupee-denominated acquisition costs and sale proceeds. However, a foreign investor's actual return in its home currency can be lower when the rupee depreciates against the dollar.
For example, an overseas investor may purchase Indian shares when the exchange rate is ₹90 per US dollar and sell them when it reaches ₹100 per dollar. Even if the investment generates a profit in rupee terms, currency depreciation can reduce the investor's dollar-denominated return.
A dollar-based calculation mechanism could potentially align taxable gains more closely with currency-adjusted investment returns. However, the actual effect would depend on the proposed calculation method, eligibility conditions and any implementing legal provisions.
Government Faces a Revenue Trade-Off
Any reduction in LTCG tax would also have to be assessed against its potential impact on government revenue.
According to figures reported in Parliament and cited by Business Standard, the Centre collected approximately ₹1.29 lakh crore from LTCG tax on equity transactions in Assessment Year 2025-26, compared with ₹72,249 crore in the preceding assessment year. The government has previously indicated that capital gains tax rates are reviewed through the annual Budget process, taking macroeconomic conditions into account.
A lower tax rate could potentially encourage investment participation and influence trading and investment decisions. However, the resulting impact on tax collections would depend on market activity, the volume of realised gains and investor behaviour.
Consequently, the government would need to weigh the possible benefits of attracting investment against the revenue implications of any reduction.
What Could the Proposed Changes Mean for Investors?
If implemented, a reduction in the LTCG tax rate could lower the tax burden on eligible investors selling long-term equity investments. A revised calculation mechanism for foreign investors could also change how currency movements affect their taxable gains.
However, changes to capital gains taxation alone may not reverse foreign investor outflows. Global interest rates, relative market valuations, corporate earnings, economic growth expectations and exchange-rate movements also influence investment decisions.
For domestic retail investors, the implications would depend on whether any revised rate or calculation mechanism applies broadly or is limited to specific investor categories.
No Final Decision Yet
The reported review signals that the government is examining concerns surrounding India's equity market taxation amid substantial foreign investor withdrawals. However, the 12.5% LTCG tax rate remains the applicable rate under the existing framework unless and until a relevant change is formally announced and implemented.
Investors and tax professionals should monitor official Finance Ministry announcements, the upcoming Union Budget and any subsequent legislative amendments or notifications before making decisions based on the proposed changes.
CAclubindia
