Government Mulls Cutting LTCG Tax and Switching to Dollar‑Based Tax for Foreign Investors Ahead of 2027‑28 Budget

What Happened

The government is weighing a reduction of the 12.5% long‑term capital gains (LTCG) tax for both domestic and foreign investors and a shift to taxing foreign investors on dollar‑denominated gains instead of rupee gains. Officials say the move aims to revive market sentiment after two years of flat or negative returns and weak wage growth.

Reaction

A senior government official told The Indian Express, "We are discussing every option." Finance Minister Nirmala Sitharaman called the debate on LTCG tax "healthy" and said she is keen to hear more. At the Bloomberg New Economy event she noted that both domestic and foreign investors raise concerns about the LTCG rate and the securities transaction tax. Retail participation has risen sharply since the pandemic. Retail shareholding in NSE‑listed firms grew from 6.58% (Rs 7.23 lakh crore) in March 2020 to 7.66% (Rs 33.16 lakh crore) in June 2024 before slipping to 7.12% (Rs 28.97 lakh crore) in March 2026. Demat accounts with CDSL rose to 19.34 crore in September 2026 from just 2.12 crore in March 2020. Foreign Portfolio Investor (FPI) confidence has also waned. For a decade domestic fund inflows offset large FPI exits, but recent overvalued stock fears, higher global rates and the lack of AI‑related investment play have curbed new FPI money. The current tax structure, which forces foreign investors to pay LTCG in rupee terms, is seen as a further deterrent. Earlier this year, on June 5, the government removed withholding tax and LTCG tax on foreign investors’ government bond holdings, after they previously faced 12.5% LTCG, 30% short‑term gains tax and about 20% withholding on interest. State Bank of India’s Ecowrap report (Oct 12) recommends extending the equity holding period to 2‑3 years and abolishing the LTCG tax to lock in hot‑money flows.

Context

Section 72 of the Income‑Tax Act, 2025, allows foreign‑currency conversion relief only for non‑resident investors, leaving domestic and FPI investors without the benefit. The proposed changes target both the high tax rate and the rupee‑based calculation to make Indian equities more attractive to global capital.