Govt seeks views on LTCG, STT amid FPI exit

The Indian government has solicited opinions from investors, market professionals and tax experts regarding the potential adjustments to long-term capital gains (LTCG) tax and securities transaction tax (STT), amid a decline in overseas investor activity, sources disclosed. Finance Minister Nirmala Sitharaman alluded to a heated discussion during a national capital event held on October 13.

The minister noted the impending budget preparations and refrained from committing to any specific policy changes at that juncture, specifying the matter had also been discussed with investors both within and outside India.

Concerns have been voiced to waive these levies to bolster market stability and entice foreign capital, which has been in decline. The government's remarks on LTCG tax have inadvertently bolstered stock prices, as India has witnessed a $924 billion reduction in market capitalization since its September 2024 peak. The revenue impact of any decision on LTCG or STT must be carefully evaluated, particularly given the rising costs for fertiliser subsidies due to geopolitical tensions and the funding necessities for expansive social sector initiatives, said a source.

During FY25, the total LTCG collected amounted to Rs 1.29 lakh crore, more than double the Rs 72,249 crore gathered in the prior year.

Market participants have advocated for simultaneous levies of LTCG and STT, arguing this constitutes double taxation. With a surge in Foreign Portfolio Investments (FPIs) exiting equities this year, the demand for modifications to the LTCG regime has grown. In June of this year, India abolished LTCG and withholding tax on interest from government securities held by FPIs, which raised hopes for relief in the equity market.

Some opposition groups have contended that lifting these levies would considerably reduce the tax pool shared with states.

Currently, LTCG is levied at 12.5% on stocks held for over 12 months, inclusive of cess and surcharges, equating to nearly 15%. Additionally, FPIs face an STT of 0.1% on both the buyer and seller, alongside a stamp duty of 0.015% for the buyer. STT collections for FY26 are projected to reach Rs 57,522 crore, marking a 52% increase from the previous year's April 1 to October 14 period.

Tax professionals have underscored the need for Indian capital markets to remain competitive, particularly in the context of a volatile geopolitical landscape where several countries, such as the US, UK, Singapore, Hong Kong, South Korea, and Taiwan, do not impose capital gains tax on non-residents trading in securities. Scrapping the capital gains tax on FPIs, coupled with an increase in STT, would potentially neutralize revenue losses while alleviating transactional complications for FPIs and discouraging high-frequency trading.

Furthermore, the tax regime should ensure clarity and consistency in treaty benefits, following the Supreme Court's January ruling which mandated the taxation of Tiger Global's capital gains from its $1.6 billion Flipkart sale to Walmart, disallowing the investment firm from claiming exemption under India-Mauritius DTAA. As the upcoming budget in February 2027 presents an opportunity to reassess the tax regime, experts propose that a holistic review of the tax burden on foreign portfolio investors be undertaken, given that they do not face a capital gains tax in other major markets but are subject to dual levies of LTCG and STT in India.