Centre reviews LTCG Tax structure amid Foreign Investor Outflows

India’s equity market is witnessing significant foreign investment withdrawals, prompting discussions about changes to its capital gains tax structure.

The Centre is reportedly reviewing the long-term capital gains (LTCG) tax framework, with a possible decision expected in the coming weeks ahead of the Union Budget.

According to some media reports, the government is examining ways to make Indian equities more competitive among global investment destinations.

The review comes amid concerns over taxation and the impact of rupee depreciation on foreign investors’ returns.

Currently, listed equity shares attract LTCG tax at 12.5% on annual gains exceeding ₹1.25 lakh.

The tax applies to domestic and foreign investors without indexation benefits. However, gains from unlisted shares do not qualify for this exemption.

The Centre has reportedly held discussions with industry representatives, the Securities and Exchange Board of India (SEBI), the Central Board of Direct Taxes (CBDT), banks and other stakeholders.

These consultations aim to assess the existing tax structure and its impact on investment flows.

Moreover, the government is comparing India’s LTCG rates with taxation systems in major global economies.

Several countries, including Singapore, Hong Kong, the UAE and the UK, offer capital gains tax exemptions on certain equity investments, subject to specific conditions.

These international frameworks have become part of the ongoing review.

Foreign portfolio investor (FPI) withdrawals have added urgency to the discussions. According to Central Depository Services Ltd (CDSL) data, cumulative FPI equity outflows reached ₹3.1 lakh crore in 2026.

This figure exceeds the ₹1.7 lakh crore withdrawn during the entire previous year. Consequently, concerns have emerged over India’s attractiveness as an investment destination.

Another proposal reportedly involves calculating foreign investors’ capital gains in dollar terms instead of relying entirely on rupee values.

Currently, India calculates taxable capital gains in rupees. However, currency depreciation can reduce overseas investors’ actual returns when converted into dollars, even when their taxable gains remain unchanged.

The government is reportedly examining whether such changes could improve the investment environment.

The discussions also include the possibility of reducing or restructuring LTCG tax. However, the government has not announced any official decision on these proposals.

Any revision could affect foreign investment flows, domestic investors and India’s broader equity market.

Investors will therefore watch the upcoming Union Budget for clarity on the government’s plans.

Image from Pxhere (Free for commercial use / CC0 Public Domain)

Image published on January 30, 2017

Image Reference: https://pxhere.com/en/photo/572367