India LTCG Tax Review Brings STT Burden Into Focus

Why the LTCG debate has returned

The government has initiated a reassessment of long-term capital gains tax and securities transaction tax. Finance Minister Nirmala Sitharaman said on October 13 that she would seek inputs on LTCG. She also said the debate around market taxation was healthy. Her comments did not amount to a commitment to change either levy. The discussion has gained attention amid heavy foreign investor selling in domestic equities. Reports say the Centre is exploring ways to make the tax regime more attractive. Any final decision could be taken in the Union Budget 2027-28. For now, investors should treat proposed changes as policy discussions, not announced rules.

The current tax structure for listed equities

Long-term gains on listed equities are currently taxed at 12.5%. The rate applies to gains above Rs 1.25 lakh in a financial year. It applies to domestic investors and foreign portfolio investors. Listed shares must generally be held for more than 12 months to qualify as long term. The current framework does not provide indexation benefits for these equity gains. The Rs 1.25 lakh threshold does not apply to gains from unlisted shares. Applicable surcharge and cess can raise the effective tax incidence. Short-term gains on specified listed equity transactions are taxed at 20% when required STT conditions are met.

Key equity-tax provisions at a glance

The review involves several charges rather than LTCG in isolation. STT is levied on specified transactions in the securities market. Unlike capital gains tax, STT is based on transaction value rather than profit. Delivery-based equity trades include a 0.1% STT on the buyer and seller. Stamp duty of 0.015% is charged on the buyer in the cited framework. These charges affect the economics of buying, selling and portfolio rebalancing. The policy debate therefore centres on the cumulative burden on equity investors. The table summarises the provisions cited in the current discussion.

Why foreign investor flows matter

The review comes as foreign portfolio investors have been selling Indian equities heavily. One report cited FPI withdrawals of Rs 3.04 lakh crore from equities in 2026. Policymakers are considering whether lower LTCG could improve India’s appeal to overseas capital. Reports also suggest dollar-based calculation of taxable gains for foreign investors is under discussion. Such a method would differ from calculating gains in rupee terms. The stated aim is to make Indian equities more competitive with other markets. However, no dollar-based tax method has been announced. A tax change alone may not resolve every factor behind foreign fund outflows.

The challenge of tax parity and round-tripping

A central concern is maintaining parity between domestic and overseas investors. The government is also weighing concerns about round-tripping of funds. A different tax treatment for foreign investors could create difficult policy questions. Officials must consider competitiveness alongside equal treatment across investor groups. Sitharaman said asset classes had earlier been brought closer to parity. She said this was intended to prevent investors from speculating on which asset offered greater leverage. That framing makes a broad tax redesign more complex than a simple rate cut. Any eventual proposal would need to balance investor relief with the integrity of the tax framework.

SBI Research proposal on patient capital

SBI Research has proposed abolishing LTCG tax on equities. It has also suggested extending the equity holding period to two or three years. The proposal is aimed at anchoring volatile capital flows for longer periods. SBI Research linked sudden foreign outflows with pressure on the rupee. Its Ecowrap report described the changes as a way to retain investors longer. The recommendation is not government policy. It is one input in a broader debate involving investors, experts and policymakers. Extending the holding period would materially change the definition of a long-term equity investment.

Why STT remains part of the review

STT is central because it applies whether an investor makes a profit or not. Capital gains tax, by contrast, arises only when a gain is realised. This difference matters for liquidity, market-making and routine portfolio changes. Market participants have sought a review of STT alongside LTCG. A lower LTCG rate without examining STT may not address the full transaction burden. At the same time, reducing transaction levies can have revenue implications. Policymakers must also consider the risk of encouraging excessive speculative activity. The government has not announced any specific STT reduction or removal.

What investors should watch before Budget 2027-28

The most important signal will be a formal government announcement. Investors should watch whether the review proposes a lower LTCG rate or revised exemption framework. They should also track any proposal for dollar-based taxation of foreign investors. Changes to STT could be equally relevant for frequent transactions. Treaty provisions, surcharge and cess remain relevant to the final tax incidence. The Union Budget 2026 retained the 12.5% LTCG framework for listed equities and equity mutual funds. That means the current rules remain the working position unless policy is formally changed. Until then, the debate is about options, trade-offs and market competitiveness rather than settled tax policy.