LTCG Tax Cut Debate: What India's Budget May Bring

Why LTCG tax is back in focus

Long-term capital gains tax on equities has returned to the centre of investor discussions. Reports say the government is examining options ahead of Union Budget 2027-28. A possible cut in the LTCG rate is among the ideas being discussed. Dollar-based calculation of gains for foreign investors is also reportedly under consideration. The discussion comes after more than two years of flat or loss-making market returns, according to officials cited in reports. Poor wage growth has also been identified as a factor affecting investor sentiment. Foreign portfolio outflows have added to concerns about the appeal of Indian equities. None of these discussions amounts to an announced policy change.

The current equity LTCG rules

Listed equity shares qualify for long-term capital gains treatment after a holding period of more than 12 months. Equity-oriented mutual funds and eligible domestic equity exchange-traded funds also fall under this framework. Long-term gains above ₹1.25 lakh in a financial year are taxable. The tax rate is currently 12.5%. Indexation benefits are not available under the present listed-equity framework. Applicable cess and surcharge are additional to the stated tax rate. The ₹1.25 lakh threshold does not apply to gains from the sale of unlisted shares, according to the reports. Existing rules remain in force until the government formally announces and implements any revision.

Key elements of the tax discussion

The reported proposals cover more than a simple reduction in the tax rate. Policymakers are said to be reviewing the rate in comparison with major economies. One proposal would permit foreign investors to calculate taxable gains in dollar terms instead of rupee terms. That approach could change how currency movements affect the taxable return of overseas investors. Another suggestion from SBI Research is to abolish LTCG tax on equities. SBI Research also suggested extending the qualifying equity holding period to two or three years. Some market participants have separately sought lower securities transaction tax and short-term capital gains tax. These remain proposals and market demands rather than approved measures.

Current rules and reported proposals

The table separates the operative framework from items under discussion. It does not indicate that any proposal has been accepted. A rate cut would require a formal government decision. A change in the holding period would also alter when investors qualify for long-term treatment. Dollar-based taxation would be relevant specifically to foreign investors. The details of any eventual proposal could differ from the ideas currently reported.

What the Finance Ministry has said

Finance Minister Nirmala Sitharaman has said the government is keen to hear views on the removal of LTCG tax. She has also said preparations for the next Union Budget have begun. Her remarks did not commit the government to reducing or removing the levy. She said it was not the right moment to state what the government would consider. In a Lok Sabha reply on July 20, Minister of State for Finance Pankaj Chaudhary said there was no proposal under consideration to remove LTCG tax. The ministry said tax policy is reviewed periodically through the annual Budget process. Such reviews take macroeconomic parameters and fiscal considerations into account. The formal parliamentary position therefore differs from market expectations of an imminent abolition.

Why foreign investor taxation matters

Reports link the tax review to efforts to make Indian equities more competitive for overseas investors. Foreign portfolio investors may experience a difference between rupee returns and dollar returns because of currency movements. The reported dollar-based proposal would address taxable gains from that perspective. It is being discussed alongside the broader review of the 12.5% LTCG rate. The same rate currently applies to domestic and foreign investors on eligible equity returns, according to the parliamentary response. The government has held meetings with industry, SEBI, the Central Board of Direct Taxes, banks and other stakeholders, sources told Moneycontrol. Those consultations are intended to gather views on the LTCG framework and capital outflows. Consultation does not establish the final design of a tax change.

Separate G-Sec exemption should not be confused

The context also includes an exemption relating to foreign investment in Government Securities. Under that framework, FPIs and FIIs are exempt from interest income and capital gains from Government Securities. The exemption applies to income arising on or after April 1, 2026. It was introduced through the Income-tax (Amendment) Ordinance, 2026. This is separate from the taxation of gains on listed equity shares. The Finance Ministry has said it is not considering extending the Government Securities-related exemption to domestic equity investors. Investors should therefore not treat the G-Sec exemption as an equity LTCG relief measure. Equity investments continue to be governed by the existing LTCG rules.

What investors should watch before the Budget

The main issue is whether consultations result in a specific Budget proposal. Investors will watch for clarity on the LTCG rate, exemption threshold and holding period. Foreign investors will also track whether dollar-based calculation receives formal backing. Market participants may continue to seek changes to STT and short-term capital gains tax as well. Budget 2026 left the capital gains framework unchanged despite expectations from some investors. That outcome shows why discussions should not be treated as a policy announcement. Any fiscal impact from cutting or scrapping LTCG tax would be relevant to the government's decision. Until an official notification or Budget measure is released, investors should base tax planning on the current 12.5% framework.