LTCG Tax 2026: Will India Remove Tax on Stock Market Profits to Bring Back Foreign Investors?

LTCG Tax Latest News, October 27, 2026: The central government is reportedly examining possible changes to Long-Term Capital Gains (LTCG) tax on equity investments as concerns grow over continued selling by foreign investors in the Indian stock market. Market participants and tax specialists have called for a review of the existing tax structure, arguing that lower taxation could make Indian equities more attractive to international investors.

The discussion comes ahead of the next Union Budget, with Finance Minister Nirmala Sitharaman indicating earlier this month that the government is willing to consider suggestions regarding capital market taxation.

However, removing LTCG tax is not a confirmed government decision. Even if the tax is reduced or abolished, analysts believe that foreign investment flows will depend on several other factors, including stock valuations, corporate earnings and global market conditions.

Why Is the Government Reviewing LTCG Tax in 2026?

The debate over equity capital gains taxation has intensified following substantial selling by Foreign Institutional Investors (FIIs), also known as Foreign Portfolio Investors (FPIs).

According to figures cited in the October 27 report, foreign investors have sold Indian equities worth more than ₹3 lakh crore over the preceding 12 months.

This sustained selling has increased concerns about market liquidity, investment sentiment and India's competitiveness compared with other emerging markets.

Some market participants believe that reducing taxes on investment profits could improve post-tax returns and encourage overseas investors to reconsider Indian equities.

Reports suggest that the government is gathering feedback from industry representatives and tax professionals as part of its broader examination of capital market taxation.

However, there has been no official announcement confirming that LTCG tax will be removed.

What Did Finance Minister Nirmala Sitharaman Say About LTCG Tax?

Speaking at an event in New Delhi on October 13, 2026, Finance Minister Nirmala Sitharaman acknowledged the ongoing discussion surrounding capital gains taxation.

She indicated that Budget preparations were underway and that it would be premature to reveal which recommendations the government might accept.

Her remarks have encouraged further debate about whether the next Union Budget could include changes to equity investment taxes.

However, the statement should not be interpreted as a commitment to abolish LTCG tax.

The government may consider several alternatives, including changes to tax rates, holding periods or other provisions affecting investors.

LTCG Tax Rules 2026: How Much Tax Do Stock Market Investors Pay?

Under the tax framework described in the report, long-term capital gains from eligible listed equity shares and equity-oriented mutual funds are taxed at 12.5% on gains exceeding the applicable annual exemption threshold.

For eligible transactions covered by Section 112A, the annual exemption threshold is ₹1.25 lakh.

Listed equity shares generally qualify as long-term assets when held for more than 12 months.

The effective tax burden may increase after adding applicable surcharge and health and education cess.

Investors also face transaction-related charges, including Securities Transaction Tax (STT) and stamp duty.

For example, delivery-based equity transactions generally attract STT of 0.1% on both purchases and sales, while the buyer pays stamp duty at the applicable rate, generally 0.015%.

These charges can affect the overall cost of investing, particularly for investors managing large portfolios.

LTCG Tax History: Why Was It Removed in 2004 and Reintroduced in 2018?

India's taxation system for long-term equity gains has undergone several major changes over the past two decades.

In 2004, the United Progressive Alliance (UPA) government, under then Finance Minister P. Chidambaram, introduced a major change to the taxation of listed equity investments.

Long-term capital gains on qualifying equity transactions were exempted from tax, while Securities Transaction Tax was introduced.

The objective was to simplify taxation and collect revenue through market transactions.

For several years, eligible investors could sell qualifying shares after the required holding period without paying LTCG tax on the resulting profits.

However, the National Democratic Alliance (NDA) government reintroduced LTCG taxation on eligible equity gains in 2018.

The tax initially applied at 10% on gains exceeding the specified threshold, subject to applicable conditions and grandfathering provisions.

Subsequent changes increased the rate to 12.5%, while STT continued to apply.

This combination of capital gains taxation and transaction charges has become an important issue in the current debate.

Foreign Investors Have Sold Over ₹3 Lakh Crore in Indian Shares

One of the major reasons behind calls for tax reform is the scale of foreign portfolio selling.

According to the figures cited in the source report, FIIs have withdrawn more than ₹3 lakh crore from Indian equities through net selling over the previous 12 months.

Such selling can place pressure on stock prices, particularly when foreign investors reduce exposure to large companies and major market indices.

However, capital gains tax is only one factor influencing these investment decisions.

Foreign investors also consider currency movements, global interest rates, geopolitical developments, corporate profitability and valuations in competing markets.

Consequently, changes in tax policy may influence investment sentiment without necessarily reversing broader foreign investment trends.

What Are Tax Experts Saying About the LTCG Review?

Tax professionals have argued that India's overall taxation framework for foreign portfolio investors deserves a comprehensive examination.

Sameer Gupta, a tax leader at EY India, has called for a review of the combined tax burden faced by overseas investors.

His concerns include the interaction between capital gains tax, STT and the interpretation of tax treaty benefits.

Tax certainty is another important issue for foreign investors, particularly when investment decisions involve long holding periods and cross-border structures.

Clear and consistent application of treaty provisions, including protections for eligible grandfathered investments, could help investors assess their tax obligations more confidently.

The broader argument is that international investors consider not only headline tax rates but also regulatory predictability and the total cost of investing.

SBI Research Suggests Changes to Long-Term Capital Gains Tax

SBI Research has also reportedly recommended reconsidering the existing LTCG framework.

Among the proposals discussed are removing the tax on qualifying long-term equity gains or extending the holding period required for preferential long-term tax treatment.

One suggestion involves increasing the holding period from 12 months to two or three years.

Such a change could encourage investors to maintain equity investments for longer periods, depending on how the final tax structure is designed.

However, extending the holding period without reducing the tax burden could also affect investors who currently qualify for long-term treatment after one year.

These proposals remain recommendations rather than approved government policy.

Government Revenue: Why Removing LTCG Tax Could Be Difficult

A major consideration for policymakers is the potential impact on government revenue.

The source report cites approximately ₹1.29 lakh crore in revenue associated with long-term capital gains taxation during the previous year.

However, this figure should not automatically be treated as revenue collected exclusively from listed equity investments without examining the underlying tax data.

Removing or reducing LTCG tax could affect government receipts, although the actual revenue impact would depend on the scope of the reform, investor behaviour and market conditions.

At the same time, the government must manage spending requirements across several sectors, including subsidies and public programmes.

This creates a policy trade-off between reducing investment-related taxes and maintaining adequate revenue to finance government expenditure.

Will Removing LTCG Tax Trigger a Stock Market Rally?

Some market analysts believe that eliminating LTCG tax could improve investor sentiment and support equity prices in the short term.

However, a sustained market recovery would likely require stronger fundamentals.

According to analysis attributed to Bernstein in the source report, LTCG removal could provide a temporary boost to Indian equities, but its long-term effect may be limited if valuations remain elevated.

Foreign investors generally compare the expected returns from Indian stocks with opportunities available in other markets.

If Indian shares are trading at relatively high valuations, tax savings alone may not be enough to make them more attractive.

Corporate earnings growth, economic conditions and investment risks would continue to influence foreign portfolio allocation decisions.

Why Are Indian Stock Market Valuations Important?

Stock valuations play a central role in determining whether investors consider a market expensive or reasonably priced.

One commonly used measure is the Price-to-Earnings (P/E) ratio.

The P/E ratio compares a company's share price with its earnings per share.

A higher ratio generally indicates that investors are paying more for each rupee of company earnings, although it may also reflect expectations of stronger future growth.

Foreign investors use such valuation measures to compare Indian companies with businesses in other emerging and developed markets.

If comparable investments elsewhere offer more attractive valuations or expected returns, investors may prefer those markets even after accounting for differences in taxation.

This is why market analysts believe that reducing LTCG tax cannot independently guarantee a sustained return of foreign investment.

Will Foreign Investors Return if India Abolishes LTCG Tax?

Removing LTCG tax could improve after-tax returns for eligible investors and potentially make India's equity market more competitive.

It might also encourage some long-term investors to increase their exposure to Indian shares.

However, foreign investment decisions are influenced by a combination of economic, financial and regulatory factors.

Even with lower taxes, investors would continue evaluating company earnings, market valuations, currency risks and global investment opportunities.

A tax reduction could therefore act as one positive factor without becoming the sole reason for a major change in foreign investment flows.

What Should Investors Expect From the Next Union Budget?

As of October 27, 2026, the government has not confirmed any decision to eliminate or reduce LTCG tax on equity investments.

The ongoing discussion indicates that capital market taxation may receive attention during Budget consultations, but the final outcome remains uncertain.

Investors should distinguish between recommendations from market participants, research reports and officially announced tax changes.

Until the government introduces and implements revised provisions, the existing LTCG rules continue to apply.

The key question is not simply whether removing LTCG tax would attract foreign investors, but whether lower taxes, reasonable stock valuations and stronger corporate earnings together could improve India's long-term investment appeal.

For now, investors will need to wait for official government announcements to determine whether the next Budget brings meaningful changes to the taxation of stock market profits.

Editorial note: This is a substantially rewritten English news article based on the supplied October 27, 2026 report. Reported foreign selling figures, expert recommendations and government revenue estimates have been attributed to the source material rather than independently verified. No LTCG abolition has been presented as an approved policy.