The possible reduction in long- and short-term capital gains tax rates will encourage foreign portfolio investors (FPIs) to return to Indian equities, which they have deserted in the last few months. The move will also support the rupee, which has faced pressure from sustained capital outflows, said Jefferies, the global investment banking and capital markets firm.
However, the government will have to balance the potential revenue loss against fiscal constraints, and its broader objective of converging taxation across asset classes.
Unconfirmed news has been floating in the market on a possible across-the-board reduction in LTCG and short-term capital gains (STCG) tax rates, a targeted LTCG cut for FPIs, or allowing foreign investors to calculate gains in dollar terms to provide some relief against currency movements.
India abolished LTCG tax on listed equities in 2004 and introduced 10 per cent STCG tax and securities transaction tax (STT). However, in 2018, LTCG tax was reintroduced at 10 per cent along with STT.
Unlike several emerging markets that exempt foreign investors from equity LTCG tax, India taxes FPIs at 12.5 per cent on long-term gains and 20 per cent on short-term gains since 2024. Tax advantages previously available through certain jurisdictions under double-taxation avoidance agreements (DTAA) have also narrowed since April 2019.
Equity LTCG tax collections stood at ₹1.3 lakh crore in FY25, when domestic markets were near their peaks. STT collections are annualising at about ₹85,000 crore in FY27.
Revenue loss
Together, equity LTCG tax and STT accounted for around 8 per cent of direct tax collections and 5 per cent of gross tax revenue in FY25. The government may, therefore, need to weigh any revenue loss against the potential benefits of higher foreign investment.
An analysis of 70 large emerging market funds with assets under management of $380 billion showed India underweight by 0.3 percentage points, against a 10-year average overweight of 2.2 percentage points.
Equity-market-related exits by FPIs, foreign promoters and foreign private equity investors totalled $110 billion since April 2025. Following recent tax relief for foreign investors in government securities, debt FPI inflows reached $9 billion during June and July 2026.
Financials have seen the largest net FPI outflows since October 2024, at $16 billion, followed by information technology and consumer staples at $10 billion each. Banks, energy, utilities and real estate could benefit if foreign flows recover.
Large-caps have underperformed by 5 percentage points in 2026 and trade at a 23 per cent discount to their 10-year average valuation, potentially improving their relative appeal as earnings-growth differences narrow.
Published on October 29, 2026
