Cut Transaction Taxes Instead of Capital Gains Rates, Suggests Economist Madhavi Arora

Economist Madhavi Arora suggests lowering the transaction-tax burden instead of altering long-term capital gains rates to support Indian markets amid foreign fund outflows. Listed-equity long-term capital gains are currently taxed at 12.5% on annual gains above 1.25 lakh rupees, while delivery-based equity trades also face a 0.1% securities transaction tax on both purchase and sale legs. Arora points out that the layering of a transaction tax on top of a capital gains regime creates market friction.

Market Liquidity And AI Trade

A calibrated reduction in the securities transaction tax, especially for cash-market transactions, would improve market liquidity and signal global investors without reopening the capital gains framework. Meanwhile, a reversal of the global artificial intelligence trade could improve India's relative attractiveness, but it will not trigger a sustained return of foreign capital on its own. India's benchmark indices feature financials accounting for roughly 36% of the Nifty, while direct exposure to the semiconductor and AI-hardware cycle remains relatively limited.

Growth And Energy Vulnerability

The International Monetary Fund raised India's growth forecast from 6.4% to 7% due to resilient domestic demand and robust services. However, energy remains a major vulnerability as the crude import bill rose over 24% year-on-year in the first half of fiscal year 2027 despite lower volumes. If crude oil stays above 110 dollars per barrel for an extended period, economic growth will likely fall short of the 7% target.

Currency And Trade

The Reserve Bank of India faced severe balance of payments pressure driven by the West Asia crisis, with the FCNR+ scheme mobilizing around 143 billion dollars. Arora argues that lasting stability requires durable inflows like foreign direct investment rather than borrowed money, while noting that free-trade agreements can cushion external demand shocks but not fully offset them.

Context

Security transaction taxes and capital gains taxes both directly affect the net returns of stock market investors in India. Global capital flows into emerging markets like India are heavily influenced by US interest rates, oil prices, and currency stability.