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India weighs LTCG tax cut, dollar-based taxation for FPIs: Why the rethink ahead of Budget? - Edited bySheersh Kapoor - Published OnOct 26, 2026 | 17:57 IST - Last Updated OnOct 26, 2026 | 17:57 IST The government is considering changes to equity capital gains tax ahead of Budget 2027-28, including a possible rate cut and dollar-based taxation for foreign investors, as outflows mount and SBI calls for scrapping LTCG. The Indian government may decide on restructuring long-term capital gains (LTCG) tax on equities in the coming weeks, ahead of the Union Budget, Moneycontrol reported, citing sources familiar with the discussions, including a government official. The discussions reportedly include a review of the 12.5% LTCG rate applicable to domestic and foreign investors, as well as a proposal to calculate foreign investors’ taxable gains in dollar terms rather than rupees. The aim is to make Indian equities more competitive with other markets and improve their appeal to overseas investors. No decision has been announced. “A decision on restructuring is expected soon,” a government official told Moneycontrol on condition of anonymity, adding that the government was comparing India’s LTCG rate with those in major economies. Currently, LTCG tax on gains from listed equities is levied at 12.5%, without indexation benefits, on gains exceeding ₹1.25 lakh in a financial year. The threshold does not apply to gains from the sale of unlisted shares, according to the report. Govt reviews tax framework amid FPI outflows The reported discussions come as foreign investors continue to withdraw funds from Indian equities. Cumulative foreign portfolio investor (FPI) outflows have reached ₹3.1 lakh crore so far in 2026, substantially exceeding the ₹1.7 lakh crore withdrawn during the whole of 2025, according to data from Central Depository Services Ltd (CDSL) cited by Moneycontrol. The publication reported that the Centre has held multiple meetings with industry representatives, the Securities and Exchange Board of India (SEBI), the Central Board of Direct Taxes (CBDT), banks and other stakeholders to discuss the LTCG framework and its implications for capital flows. “There is a recognition (within the government) that the tax structure needs to be reviewed to improve the competitiveness of Indian equities and make them more attractive for foreign investors,” a senior banking official familiar with the discussions told Moneycontrol. The official added that the government was examining proposals relating to LTCG. Moneycontrol also noted differences in capital gains tax treatment across markets. According to its report, equity capital gains attract no tax in the US, subject to certain conditions, as well as in the UK, Singapore, Hong Kong, the UAE, Japan and Canada. In China, some shares are exempt, while others attract a 10% tax rate. Why the government is weighing an LTCG tax cut In a separate report, The Indian Express said discussions ahead of the Union Budget 2027-28 included lowering the LTCG rate for both domestic and foreign investors, as well as allowing foreign investors to calculate taxable gains in dollar terms. Also Read: FM Nirmala Sitharaman says open to hearing views on LTCG, says 'healthy' to have STT debate Citing officials, the newspaper reported that the discussions were partly driven by concerns over a largely flat stock market over more than two years and weak wage growth, both of which were seen as weighing on investor sentiment. It also pointed to a shift in confidence around domestic mutual fund inflows, which have historically helped absorb selling by foreign portfolio investors. “We are discussing every option,” a senior government official told The Indian Express when asked whether measures under consideration included reducing or removing capital gains tax. The newspaper also highlighted the currency-conversion issue faced by foreign investors. At present, taxable gains are calculated in rupees, meaning an investor could owe tax on a rupee-denominated gain even if currency depreciation wipes out the return in dollar terms. For instance, if an investor’s Indian shares rise 10% in rupee terms while the rupee depreciates by the same percentage against the dollar, the investor’s dollar-denominated return could be wiped out even though a taxable gain may arise under the rupee-based calculation. Calculating taxable gains in dollar terms could address this mismatch, although the proposal remains under discussion. The Indian Express also reported that the government scrapped withholding tax and long- and short-term capital gains tax on foreign investors’ investments in government bonds on June 5, as part of efforts to attract overseas funds. SBI calls for scrapping LTCG tax on equities Separately, State Bank of India (SBI) has called for a more fundamental change to equity taxation. In its Ecowrap research report dated October 12, the bank said the government should consider extending the holding period for equity investments to two or three years and abolishing LTCG tax on equities to help anchor volatile capital flows. Soumya Kanti Ghosh, Group Chief Economic Adviser at SBI, said India’s recurring episodes of capital outflows called for a broader examination of how the country was positioning itself to attract the next wave of global investment. “Artificial intelligence is increasingly shaping expectations of productivity, profitability and technological leadership. Certainty in vision and policy is the need of hour to attract capital in this area as it is the next engine of growth,” the Ecowrap report said. The proposals reported by Moneycontrol and The Indian Express, alongside SBI’s recommendation, point to a wider debate over how India taxes equity investments and attracts foreign capital. However, a possible rate cut, dollar-based taxation and the abolition of LTCG remain proposals under discussion, not announced policy decisions.
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