Growing demand for a reduction in the Long-Term Capital Gains Tax (LTCG) among stock market investors has intensified amid ongoing asset sell-offs by foreign investors and general pressure on the stock market. Finance Minister Nirmala Sitharaman acknowledged investor concerns on this matter and stated that the government would review their remarks.
These statements were made by Minister Nirmala Sitharaman on November 2 while participating in an event by a business publication in Mumbai, when she was questioned about LTCG taxation. Although she did not give a direct promise to lower taxes, she assured that the government is considering the demands raised, noting that she understands the anxieties of retail investors and stock market participants.
The Minister emphasized that all stakeholders are now voicing their concerns more actively, and she intends to consider all these points without favoring one side over another. When asked about the possibility of providing special concessions to foreign investors for investing in the Indian stock market, she reminded the need to consider the interests of domestic investors, asking: 'If we are talking about dollar investors, what about rupee, i.e., domestic investors?' Thus, the government's stance is to simultaneously attract foreign investment and care for the interests of ordinary citizens of the country.
LTCG, or long-term capital gain, refers to profit earned from selling an asset after a long period of ownership. Simply put, if you bought a stock and sold it at a higher price after a year or more, this profit is called LTCG. According to current rules, profit from the sale of stocks and equity mutual funds held for more than 12 months is taxed at an LTCG rate of 12.5%. For example, if a profit of 200,000 rupees is earned from selling stocks after more than 12 months of holding, after deducting the annual exemption of 125,000 rupees, the remaining 75,000 rupees will be taxed at 12.5%, amounting to 9,375 rupees. This formula applies if the stipulated conditions are met.
In the case where stocks or equity mutual funds were held for less than 12 months, the profit is classified as Short-Term Capital Gain (STCG). This income is subject to an STCG tax of 20%, provided the Securities Transaction Tax (STT) requirements are met. If, for instance, a profit of 200,000 rupees was earned in less than 12 months, then 20% STCG tax will be levied on the entire amount, amounting to 40,000 rupees. These calculations depend on the applicable conditions.
Discussions about LTCG tax have intensified due to continuous selling by Foreign Portfolio Investors (FPI) in the stock market. According to Reuters, foreign investors sold a record $31 billion in the Indian stock market by 2026. Foreign market participants believe that reducing the tax burden will make investing in the Indian market more attractive. This is why the issue of revising the LTCG tax is being raised. Minister Sitharaman noted that the capital gains tax structure in 2023-24 was similar, and at that time, the inflow of foreign investment into India was very strong. However, the situation has changed now, and along with the sales by foreign investors, concerns related to the market have also increased.
Meanwhile, the Securities and Exchange Board of India (SEBI) has also presented several proposals to the government regarding changes in taxation. According to Reuters, SEBI recommended abolishing the LTCG tax for foreign investors in equity capital. Furthermore, it was proposed to exempt the transfer of funds by mutual funds for domestic investors from one scheme to another from LTCG tax, provided the investor held the funds in the current scheme for more than a year. These proposals are part of recommendations submitted to the government before the budget. It is important to note that decisions on these matters are within the purview of the government, and SEBI's recommendations are not mandatory to implement.
The Finance Minister stated that capital investment is necessary to maintain the country's economic growth rate at 7% or higher, in which investments in equity capital play a vital role. The government has been working to strengthen the corporate bond market in recent years, but now, according to Sitharaman, support is needed for the stock market itself. The Minister pointed out that the government understands investor concerns.
