FM Sitharaman reopens LTCG tax debate: Why now, and can govt afford an overhaul?

The Finance Minister reopened discussion about two equity-market taxes: securities transaction tax, or STT, and long-term capital gains tax, or LTCG. Her comments matter because investors and market participants have been seeking relief while foreign money continues leaving Indian equities.

At the Bloomberg New Economy Forum in New Delhi, Sitharaman said there was “a lot of debate” over STT. She called that debate healthy and said she would be keenly hearing stakeholders’ views. She also acknowledged the approaching Budget and avoided promising a tax cut.

Markets reacted positively. The Sensex rose 1,109 points and the Nifty 50 gained 358.60 points on Tuesday. However, a review remains uncertain. The government must weigh market competitiveness, investor sentiment, revenue needs and fiscal constraints before changing the LTCG or STT structure.

Long-term capital gains tax is a tax on profit from selling an investment held for the long term. In this article, it applies to listed equity shares and equity-oriented mutual funds above an annual exemption. It matters because it directly reduces the investor’s realised gain.

Securities transaction tax works differently. It is charged when specified securities-market transactions occur, including equity trades and, after Budget 2026 changes, equity derivatives. The tax is linked to the transaction’s value or type, not simply to whether the investor made a profit. Thus, an active trader can face STT even when returns are weak.

The two taxes can add to the overall cost of investing. India raised LTCG to 12.5% in July 2024 and later increased STT on equity derivatives. Investors and market participants argue that the combined burden may reduce India’s competitiveness, though global conditions also influence decisions.

India’s July 2024 changes increased the LTCG tax rate on listed equity shares and equity-oriented mutual funds from 10% to 12.5%. The annual exemption threshold also rose, from Rs 1 lakh to Rs 1.25 lakh. These changes altered both the tax rate and the amount of gains protected from LTCG.

The government also raised the short-term capital gains tax rate from 15% to 20%. Later, in Budget 2026, it increased STT on equity derivatives. The higher STT rates were scheduled to take effect on April 1, 2026. The source does not provide the old or new STT percentages.

The government has retained the 12.5% LTCG rate despite continued foreign investor withdrawals. The sequence has intensified debate over whether India’s cumulative equity-tax burden is weakening market competitiveness. Sitharaman’s comments indicate a possible review, not a confirmed reversal or reduction.

Foreign portfolio investor withdrawals reached Rs 3.04 lakh crore from Indian equities in 2026, according to data cited from an SBI Research report. That figure is striking because it already exceeds the Rs 1.66 lakh crore withdrawn during the whole of 2025.

The pace accelerated in October. Foreign investors sold Indian equities worth Rs 44,166 crore in October through October 11. These outflows have sharpened questions about whether India’s equity-tax structure is making its markets less attractive compared with competing financial centres.

The figures do not prove that taxes caused the selling. The article also points to high US bond yields, a stronger dollar, rupee depreciation, elevated crude prices and global-growth concerns. Still, the scale of withdrawals has strengthened calls to review LTCG and STT as the government prepares for the next Budget.

Lower taxes could improve India’s appeal by reducing the cost of buying, selling and holding equities. This matters because foreign investors compare markets globally. The article notes that financial centres such as Hong Kong and Singapore generally do not tax capital gains, creating a competitive contrast for India.

The mechanism is straightforward. A lower LTCG bill leaves investors with more of their profits, while lower STT reduces transaction costs. That could improve the case for allocating capital to Indian shares, especially when investors are already concerned about currency risk or relative valuations. SBI Research proposed abolishing LTCG on equities while extending the holding period to two or three years.

However, the likely effect is limited if other conditions remain weak. Experts cited in the article say valuations, earnings growth, rupee stability, global yields and broader market conditions also shape foreign investment. Tax reform could help, but it would not guarantee a major inflow.

The article presents foreign selling as a result of several forces, not just Indian taxation. Global investors are responding to changing returns and risks across markets. This makes it difficult to determine how much of India’s outflows can be reversed through domestic tax relief alone.

High US bond yields can make dollar assets more attractive. A stronger dollar and a depreciating rupee can increase currency risk for investors measuring returns in foreign currency. Elevated crude prices can also weigh on sentiment toward India, while concerns about global growth can reduce appetite for riskier equities.

Indian market conditions matter too. The article cites valuations and earnings growth as important considerations, alongside rupee stability. Experts caution that taxes may further weaken India’s investment case when these factors are already unfavourable, but they do not identify taxation as the primary cause of the FPI sell-off.

Governments generally tax investment gains and financial transactions to raise public revenue and ensure financial-market activity contributes to the tax base. Capital-gains taxes focus on profits, while transaction taxes collect revenue from market activity. These taxes can also influence investor behaviour, including how long people hold assets and how often they trade.

The trade-off appears clearly in India’s debate. Reducing LTCG or STT could lower the cost of investing and strengthen India’s position against markets such as Hong Kong and Singapore. It might also support investor sentiment during heavy foreign outflows. But a reduction would remove or reduce a source of government revenue, while its effect on new investment would remain uncertain.

The article says any relief must reflect fiscal headroom, revenue prospects and distributional effects. The government must also establish whether taxes, rather than valuations, earnings or global conditions, genuinely constrain investor appetite. That makes a complete rollback difficult.