Foreign money exodus puts LTCG, STT on govt table: Can tax relief bring it back?

The government is reviewing two charges on equity investing: long-term capital gains tax, or LTCG, and securities transaction tax, or STT. Officials are consulting investors, market intermediaries and tax experts. The review matters because both taxes affect the cost of investing in Indian shares and may influence how attractive India looks to global funds.

The urgency follows heavy foreign selling. Foreign portfolio investors have withdrawn about Rs 3.1 lakh crore from Indian equities in 2026 so far. The government is reportedly considering cutting the 12.5 per cent LTCG rate, restructuring it, or changing how foreign investors calculate gains. It is also examining STT and a possible dollar-based calculation for foreign funds.

The Nifty is down about 13 per cent this year. Officials are also concerned about two years of weak returns, sluggish wage growth, rising retail participation and whether domestic mutual funds can keep absorbing foreign selling. No final decision or timeline has been announced.

LTCG is a tax on profit from selling listed shares held for more than one year. In India, long-term gains above Rs 1.25 lakh a year are taxed at 12.5 per cent, without indexation. Surcharge and cess raise the effective rate to nearly 15 per cent. The tax applies equally to domestic and foreign investors.

STT is different. It is charged when a securities transaction occurs, not only when an investor makes money. Therefore, an investor can pay STT on a trade that produces no profit or even a loss. Budget 2026 also increased STT on futures and options from April 1. Together, the charges affect both investment profits and trading activity.

The distinction matters because LTCG depends on the gain and holding period, while STT depends on the transaction itself. Market participants argue that India’s combination is unusually heavy. The government is now examining whether either rate, or the structure of both taxes, should change.

Foreign portfolio investors have pulled about Rs 3.1 lakh crore out of Indian equities in 2026 so far, according to CDSL data. This is the article’s clearest measure of the pressure facing Indian markets. Foreign selling can weigh on share prices and intensify concern about India’s appeal to international capital.

The comparison with the previous year is striking. FPIs withdrew Rs 1.7 lakh crore during all of 2025. The 2026 outflow is therefore nearly double the previous year’s total, even though the year is not yet complete. The Nifty has also fallen about 13 per cent for the year.

Officials are examining whether taxes are contributing to the problem. They are considering changes to LTCG and STT, including a possible LTCG cut and dollar-based gain calculations for foreign investors. No reform has been decided, but the scale of withdrawals has moved the discussion toward the finance ministry.

Lowering LTCG or STT could reduce the cost of investing and trading in Indian shares. That may improve India’s appeal to foreign funds and support market activity, especially while foreign investors are selling heavily. Stronger participation could also help prices and confidence, although the article does not promise that tax relief would reverse the outflows.

The revenue mechanism differs for each tax. Abolishing LTCG would remove tax on qualifying long-term equity gains. Cutting STT would reduce revenue from every covered transaction, including trades that are not profitable. Sudhir Kapadia has suggested exempting FPIs from capital gains tax while adjusting STT to limit the revenue loss. Puneet Singhania has proposed cutting STT first and easing LTCG later.

The government must therefore balance market support against the public finances. SBI Research proposed abolishing equity LTCG while extending the holding period to two or three years. The government is consulting market participants, but no decision or timeline has been announced.

Market participants use “double taxation” to describe India’s combination of LTCG and STT. LTCG taxes the profit from qualifying equity sales. STT is charged on the trade itself, whether it is profitable or not. An investor can therefore face a transaction charge and a separate tax on gains from the same investment activity.

Akhilesh Ranjan, a former member of the Central Board of Direct Taxes, explains the historical argument. He says STT was introduced partly to create an audit trail when long-term equity gains were not taxed. The transaction levy helped record market activity and support tax administration during that period.

LTCG on listed equities is now back, and its rate rose from 10 per cent to 12.5 per cent in the July 2024 Budget. Ranjan argues that there is no legitimate reason to retain STT in its old role. Finance minister Nirmala Sitharaman has called the debate healthy but has made no commitment.

The comparison is central to the argument for Indian tax relief. Subject to conditions, foreign investors generally pay no capital gains tax on listed equities in the United States, Singapore, the UAE, the United Kingdom, Hong Kong, Japan and Canada. This can make those markets appear less costly for global funds than India.

Taiwan offers a different structure. It has no long-term capital gains tax, but it levies a 0.3 per cent transaction tax. That means the tax is attached to the trade rather than to long-term profit. India, by contrast, charges 12.5 per cent LTCG above Rs 1.25 lakh and also charges STT on transactions.

The article links this difference to India’s struggle to attract foreign money. It also notes that Taiwan has drawn heavily on global funds this year. These comparisons are informing the review, but India has not announced whether it will cut LTCG, change STT, exempt FPIs or retain the current structure.