Capital gains tax: India rules out FPI cut in 2026

What the government is saying on FPI capital gains tax

India is not looking at a cut in capital gains tax for foreign portfolio investors (FPIs) to address capital outflows, according to a senior government functionary. The official described recent FPI outflows as “strategic” and not linked to India’s attractiveness as an investment destination. The comment comes at a time when markets are closely tracking whether the Union Budget could include measures aimed at reviving foreign risk appetite.

The immediate takeaway for investors is that a tax-rate cut for FPIs is not on the table “for now”. That framing matters because market conversations have periodically included calls for a more favourable long-term capital gains (LTCG) regime for foreign investors, especially for longer holding periods.

A moving tax calendar: new rules from April 1, 2026

Alongside the policy stance on capital gains tax, India has formally notified the Income-tax Rules, 2026. These rules will come into effect from April 1, 2026, and are positioned as a reset in how direct tax administration will be run under the new framework.

A key feature of the new rules is sharper guidance on how to determine holding periods for capital assets in complex cases. Holding period is central to whether a gain is treated as short-term or long-term, and therefore impacts the applicable tax treatment. By clarifying previously ambiguous situations, the rules aim to reduce classification disputes at the time of taxation.

Holding period clarifications: conversion and legacy declarations

The rules state that when a security is converted, the holding period will include the time for which the asset was held before conversion, such as when debentures are converted into shares. This is intended to prevent an investor from being disadvantaged simply because the form of the asset changed.

For assets declared under the Income Declaration Scheme (IDS) 2016, the holding period treatment differs by asset type. For immovable property, the holding period is counted from the original date of acquisition. For other assets, the holding period is considered from June 1, 2016, which is linked to the IDS framework.

Cross-border restructuring: counting holding period across entities

The rules also deal with cases where assets are transferred from a foreign branch to an Indian entity, such as during corporate restructuring. In such situations, the holding period includes the duration for which the foreign entity held the asset before the transfer.

In addition, the rules align the classification of capital gains with the nature and status of the asset at the time of taxation, particularly in pooled or pass-through structures. The stated intent is to reduce ambiguity when multiple asset types and ownership layers exist.

Digital taxation: “sizeable economic presence” thresholds

To address digital and remote business models, the rules define thresholds for establishing a sizeable economic presence in India. A non-resident entity may be subject to Indian taxation if it earns INR 20 million (₹2 crore) or more from Indian transactions, or engages with 300,000 or more users in India.

This expands the tax net to include digital businesses that operate without a physical presence, using economic activity and user engagement as the trigger for potential taxability.

Where LTCG stands today, including the equity exemption

Currently, long-term capital gains arise from the sale of capital assets such as stocks and property held for more than 24 months and are taxed at 12.5% across all capital assets, as cited in the material provided. For listed equity shares, equity-oriented mutual funds and units of business trusts, gains up to ₹1.25 lakh are exempt.

Market watchers have been debating whether the exemption threshold could be raised. VK Vijayakumar, Chief Investment Strategist at Geojit Investments, said that an increase in the exemption limit for LTCG from the current ₹1.25 lakh to a higher threshold would be positive for the market. He also said expectations of sweeping tax relief are muted, given the substantial income tax cuts announced in the 2025 Budget, though selective tweaks remain possible.

Budget and FPI-facing proposals: rates unchanged, STT higher

India’s Finance Minister presented the Finance Bill for FY 2026-27 on 1 February 2026, with proposals effective from 1 April 2026 unless stated otherwise, coinciding with the effective date for the new Income-tax Act, 2025. Proposals relevant to FPIs include no changes to FPI tax rates or the due date for filing income tax returns.

The Budget proposals also include taxation of gains arising from buy-backs of shares as capital gains. Separately, Securities Transaction Tax (STT) on derivatives is set to rise from April 1, 2026: futures STT to 0.05% from 0.02%, options premium STT to 0.15% from 0.1%, and STT on exercise of options to 0.15% from 0.125%.

Competing views: relief for foreigners vs policy certainty

The broader debate extends beyond headline rates. Some market participants have argued for moving towards residence-based or destination-based taxation principles for foreigners, including the idea of not applying withholding tax on capital gains enjoyed by foreigners in India, on the logic that they would be taxed in their home country.

At the same time, people familiar with deliberations have said the issue has been discussed with Sebi and government officials, with FPIs repeatedly underlining the need for certainty in tax policy. The official stance in the current context, however, is that a capital gains tax cut for FPIs is not being pursued for now.

A brief history of listed equity capital gains taxation

Capital gains on listed equity securities were taxable in India prior to 2004, but LTCG tax was abolished when STT was introduced that year. In 2018, LTCG tax on listed equity transactions was reintroduced at 10% beyond a specified threshold. The rate was later raised to 12.5% last year, as noted in the material.

Political scrutiny of capital gains taxation has also continued. AAP MP Raghav Chadha raised the issue in the Rajya Sabha, calling capital gains tax rates excessively high and stating that such rates discourage long-term investments.

Key numbers and dates at a glance

Why this matters for Indian markets

For equities, the near-term signal is that policy makers are not using capital gains tax cuts as a lever to directly counter foreign portfolio outflows. That puts more weight on other drivers of flows, such as global risk appetite, India’s earnings outlook, and the predictability of tax administration.

At the same time, the April 1, 2026 effective date is important because multiple tax administration changes and market-linked tax costs begin together. With the Income-tax Rules, 2026 aiming to reduce ambiguity on holding periods and asset classification, the direction of travel appears focused on clearer rules and stable rates rather than immediate rate cuts for FPIs.

Conclusion

A senior official has made it clear that India is not planning a capital gains tax cut for FPIs at this stage, describing outflows as strategic rather than a referendum on India’s investment appeal. Meanwhile, the Income-tax Rules, 2026 and multiple Budget-linked changes, including higher STT on derivatives, are scheduled to take effect from April 1, 2026. The next key checkpoints for markets are the implementation of these rules and any subsequent clarifications that shape compliance and tax certainty for both domestic and foreign investors.