Centre Plans Major Tax Cut on Stock Profits Before Diwali to Stop Investor Outflows

What Happened

The central government is preparing to overhaul the long-term capital gains tax on shares and mutual funds before Diwali, without waiting for the next budget. Financial institutions point out that this tax is slowing down investments into the Indian stock market. Market data shows foreign investors have pulled out nearly three lakh crore rupees in the current financial year. SEBI, CBDT, and various banks held discussions with the Centre to address this issue.

The Tax and Its Impact

Long-term capital gains tax applies when an investor sells shares or mutual funds held for more than 12 months, making a profit above one lakh twenty-five thousand rupees in a financial year. The tax rate is 12.5 percent, which was raised from 10 percent in the July 2024 budget. This rule only applies to listed company shares. Other nations like the US, UK, Singapore, Hong Kong, UAE, Japan, and Canada do not collect this tax, while China offers tax exemptions on certain stocks and charges 10 percent on others. Lowering India's tax could attract foreign funds and strengthen the rupee.

Changing Currency Rules

Authorities are also considering changes to how foreign investors calculate this tax. Currently, gains are calculated purely in rupees. With the sharp fall in the rupee exchange rate, officials are reviewing proposals to factor in the drop of the Indian rupee against the US dollar when foreign investors calculate their tax.

Context

Long-term capital gains taxes directly influence how attractive a country's stock market feels to global investors who compare returns across international borders. Governments often adjust these rates during periods of market sluggishness to revive trading activity and protect domestic market values.