LTCG tax removal: likely impact on India stocks

Why LTCG is trending again

A fresh debate on long-term capital gains (LTCG) tax is playing out across investor forums. SBI Research has called for abolition of LTCG tax on equities to revive investment levels. It also proposed extending the holding period to two to three years to encourage longer commitments. Social media discussion picked up after comments attributed to the Finance Minister suggesting openness to views. At the same time, multiple official clarifications say there is no proposal under consideration to scrap LTCG tax on equity investments. That split between advocacy and policy stance is driving the conversation. Investors are also comparing equity taxation with other jurisdictions when thinking about global allocation. The immediate practical point is simple: current law continues until Parliament changes it.

What the current LTCG framework looks like

For listed equity shares and equity-oriented mutual funds, the general framework introduced in July 2024 sets a 12.5% LTCG tax rate. The tax applies on eligible gains exceeding ₹1.25 lakh in a financial year, subject to applicable conditions and exemptions. The holding period for an asset to be considered long-term remains a key variable in the debate. SBI Research argues for a longer holding period of around two to three years if abolition is considered. Punit Shah of Dhruva Advisors, however, has spoken about rationalisation that could include abolishing LTCG and reducing the holding period for equities to qualify as long-term. These different suggestions reflect two policy objectives that can conflict. One is encouraging longer holding and stable flows. The other is simplifying rules and reducing friction for investors.

The foreign flow backdrop cited in the debate

SBI Research linked its proposal to the scale of foreign portfolio investor (FPI) withdrawals. Its report said equity outflows by FPIs amounted to Rs 3.51 lakh crore between 2021 and September 2026. It also highlighted that 2026 alone saw outflows exceeding Rs 2.61 lakh crore, over and above Rs 1.66 lakh crore recorded in 2025. Separately, another widely shared update said FPIs sold about $18.03 billion worth of Indian equities so far in 2026. That same update noted the trend improved in July, with overseas investors buying $1.25 billion of shares so far in that month. Commentators also pointed to elevated crude prices and the rupee sliding to record lows as sentiment headwinds. This context matters because the tax debate is being framed as one tool to improve competitiveness, not as a standalone fix.

What supporters say removing LTCG could change

Supporters argue that scrapping LTCG on eligible equity gains would directly improve post-tax returns. For long-term investors, the most visible benefit is avoiding the tax otherwise payable on qualifying gains above the exemption threshold. Investors pushing for a review also say the levy reduces what they retain from successful investments. Some believe lower taxation can encourage longer-term participation in equities. SBI Research framed the move as a way to make Indian equities more attractive to foreign capital. Its report also talked about anchoring hot money flows by combining a longer holding period with removing LTCG. In addition, Punit Shah pointed out there is already an additional incidence of taxes through Securities Transaction Tax (STT). He said STT was introduced in lieu of capital gains tax, and that combined burdens can make equity transactions expensive.

What critics and cautious voices highlight

Even if LTCG is removed, the market-wide impact is uncertain. Stock prices still depend on corporate earnings, economic growth, interest rates, liquidity, currency movements, and global risk appetite. A tax change alone may not reverse a sustained market decline or persistent outflows. One shared data point noted the Nifty 50 has lost about 7.2% so far in 2026, underperforming some peers, despite sustained buying by domestic investors. Another concern is fiscal: removing a tax could reduce collections unless higher activity offsets part of the loss. The government has emphasised predictability, and some analysts say tax clarity is better received than frequent changes. Several posts also warned investors not to do speculative tax planning until a valid legal change is enacted and effective. In practical terms, compliance expectations do not change because the debate is active.

Government stance: debate acknowledged, proposal denied

The Finance Ministry has told Parliament there is no proposal to scrap LTCG tax on equities for domestic investors. It clarified that the 12.5% rate for domestic and retail investors is the same as that applicable to FPIs for equity investments. Another statement in the Lok Sabha said there is no proposal to abolish the levy at present, even as demands continue for relief to improve sentiment. The government has also said the equity tax regime remains the same for domestic investors and FPIs. This matters for market expectations, because it reduces the chance of a near-term surprise. It also signals that discussion and policy change are different stages. Investors should treat comments about being open to views as part of consultation, not as an announced exemption.

How this links to other recent tax moves

The same set of updates noted India recently exempted FPIs from LTCG tax on investments in government securities. That exemption is effective April 1, 2026 and was described as a move to support the rupee and revive overseas flows. The stated objective was to align taxation of government securities with comparable jurisdictions. It was also positioned as a way to attract stable, long-term foreign capital from pension funds, insurers and sovereign wealth funds. Importantly, officials clarified that this rationalisation applies only to FPI investments in government securities. It does not extend to equities, and it does not change domestic investors’ equity taxation. For investors following headlines, this distinction is central. Confusion often arises when debt-market changes are assumed to spill over into equities.

Revenue trade-offs: what collections show

Tax collections are a key constraint in the policy conversation. One widely cited figure said collections from LTCG tax on equities rose to ₹1.29 lakh crore in assessment year 2025-26 from ₹72,249 crore a year earlier. Another parliamentary response said the levy generated more than ₹2.01 lakh crore in revenue over the past two assessment years. These are not small numbers in a budget context. That is why supporters of abolition often argue that higher investment activity could offset some revenue loss, rather than assuming a direct gap. Aditya Birla Sun Life AMC MD and CEO A. Balasubramanian argued specifically for removing LTCG tax on foreign institutional investors, saying it would not materially hurt revenues while improving competitiveness. However, that view is part of the debate, not an enacted policy. Any change would still depend on scope, conditions, and anti-avoidance rules.

Key numbers and claims circulating in investor forums

The discussion has a few recurring data points that investors use to form expectations. The table below consolidates the figures and statements referenced in the current conversation.

What investors can do while policy remains unchanged

Until any law changes, investors must apply the LTCG rules currently in force. The debate still matters because it can influence expectations about future market competitiveness and flows. If Parliament eventually removed tax on specified long-term gains, post-tax returns on eligible disposals could improve. The effect would vary by portfolio size, realised profits, and how any exemption is designed. It would also depend on whether relief is prospective and whether it applies only to listed equities or includes conditions. Market participants should also remember the wider drivers highlighted in discussions, such as earnings, GDP growth, inflation and monetary policy. Some experts say policy stability is itself supportive for investor decision-making. For now, the most actionable takeaway is separating discussion from decision, and waiting for a concrete legal proposal before changing long-term plans.