Government weighs capital gains tax cuts to revive stock market sentiment

The Centre is considering a reduction in long-term capital gains (LTCG) tax on equities, alongside a proposal to tax foreign investors on dollar-denominated gains rather than rupee profits, as it seeks to revive investor confidence ahead of the Union Budget 2027-28.

With stock market indices delivering little or no returns over the past two years, officials believe that a more favourable tax regime could encourage investment and restore market sentiment, particularly among the growing middle class, which has increasingly turned to equities to supplement household incomes amid sluggish wage growth, The Indian Express reported.

Currently, long-term capital gains on equities are taxed at 12.5 per cent, meaning investors retain ₹87.50 from every ₹100 of profit before applicable exemptions. Foreign portfolio investors face an additional disadvantage, as their taxable gains are calculated in rupees, even when currency depreciation erases their profits in dollar terms.

For instance, an overseas investor who purchases Indian shares worth $1,000 at an exchange rate of ₹80 to the dollar would invest ₹80,000. If the shares appreciate by 10 per cent while the rupee weakens to ₹88 against the dollar, the investment would be worth ₹88,000, leaving the investor with no dollar-denominated gain, yet attracting ₹1,000 in capital gains tax under the current rate.

Retail participation has expanded substantially since the Covid-19 pandemic, with demat accounts registered with the Central Depository Services (India) Limited rising from 2.12 crore in March 2020 to 19.34 crore in September 2026. However, retail shareholding in NSE-listed companies declined from 7.66 per cent in June 2024 to 7.12 per cent in March 2026.

The government is also concerned that domestic mutual fund inflows may no longer adequately offset substantial foreign portfolio investor outflows, which have repeatedly unsettled the market.

The State Bank of India has recommended abolishing LTCG tax on equities and extending the qualifying holding period to two or three years, thereby encouraging longer-term investment rather than speculative flows.

Finance Minister Nirmala Sitharaman has described the debate over capital gains taxation as healthy, while expressing interest in hearing different perspectives. Although no decision has been announced, the proposed changes reflect the government's efforts to strengthen market confidence and attract overseas capital amid intensifying global competition for investment.