New Delhi is moving fast on a tax overhaul that could reshape how foreign money flows into Indian equities. According to Moneycontrol, sources close to the discussions confirm the Centre is reviewing the current 12.5% long-term capital gains (LTCG) rate. The aim is blunt: make Indian stocks competitive again. No official announcement has dropped yet, but the urgency is palpable as the government compares India’s tax burden with major global economies.
The catalyst is bleeding capital. Foreign portfolio investors have pulled out ₹3.1 lakh crore so far in 2026. That is nearly double the ₹1.7 lakh crore withdrawn during all of 2025, data from Central Depository Services Ltd shows. One senior banking official told Moneycontrol the recognition is clear: the current structure hurts competitiveness. "We are discussing every option," a senior government official admitted to The Indian Express, including potentially scrapping the tax entirely.
A key friction point is currency conversion. Currently, FPIs calculate gains in rupees. If the rupee depreciates by 10% while shares rise 10%, an investor might have zero real return in dollars but still owes tax on the rupee-denominated profit. Proposals to calculate taxable gains in dollar terms would fix this mismatch. For context, the US, UK, Singapore, and Japan currently levy no tax on equity capital gains under certain conditions, while China taxes some at just 10%.
State Bank of India is pushing for an even sharper break. In an Ecowrap report dated October 12, SBI advised the government to extend the holding period for equity investments to two or three years and abolish LTCG tax altogether. Soumya Kanti Ghosh, Group Chief Economic Adviser at SBI, argued that recurring outflow episodes demand a fundamental repositioning of India’s investment appeal.
The debate is heating up ahead of the 2027-28 Union Budget. Finance Minister Nirmala Sitharaman has already signaled openness to hearing views on the matter, calling the debate "healthy." With the stock market flat for over two years and wage growth sluggish, policymakers are betting that tax relief will unlock the next wave of global investment. Watch for announcements in the coming weeks.