India's debate on Long-Term Capital Gains (LTCG) taxation has resurfaced following an SBI Research proposal to abolish LTCG tax on equity investments. The proposal comes amid foreign portfolio investor (FPI) outflows exceeding ₹3 lakh crore during 2026. It raises a larger policy question: how can India balance revenue with its ambition to become a leading global investment destination?

The debate presents an opportunity to assess whether the existing tax framework adequately supports the goal of long-term capital formation.

Evolution of India's capital gains tax framework

Capital gains taxation has witnessed repeated legislative changes, reflecting shifting policy priorities and revenue considerations.

In 2004, the government introduced Securities Transaction Tax (STT) alongside an exemption for qualifying long-term equity gains under Section 10(38) of the erstwhile Income-tax Act. In 2018, this exemption was withdrawn. Section 112A reintroduced LTCG taxation at 10% on qualifying gains exceeding ₹1 lakh, subject to grandfathering.

The 2024 amendments brought another significant restructuring. The LTCG rate increased to 12.5%, with the annual exemption threshold rising to ₹1.25 lakh. Holding periods were also rationalised across asset classes. Indexation benefits were withdrawn for most assets, while short-term gains on specified financial assets attracted a higher rate of tax.

This chain of amendments reflects India's evolving approach to capital gains taxation, and to balance revenue considerations whilst strengthening investors’ confidence.

Investors need to examine various factors that directly influence valuations, exit strategies and expected returns. Several international financial centres have adopted investor-friendly capital gains frameworks. Singapore and Hong Kong provide useful examples. Their approach distinguishes investment gains from commercial trading profits, and India can draw useful lessons from these frameworks.

Consideration beyond tax collections: The wider fiscal benefits

With the suggested rationalisation of LTCG taxation leading to a reduction in revenue for the Indian government, one must also consider its fiscal implications from increased investor participation and deeper capital markets.

Equity LTCG collections reached ₹1,29,158 crore in FY 2024-25. The government may have sufficient fiscal headroom to absorb an estimated revenue loss of ₹40,000–50,000 crore arising from the suggested abolition of LTCG taxation.

The more compelling proposition for analysis is that deeper capital markets can generate additional economic activity that can create revenue opportunities across interconnected financial services, and the resulting benefits extend well beyond revenue from LTCG taxation.

Consider a scenario involving increased brokerage and advisory activity. This could generate additional GST collections on taxable services. It would also increase income-tax collections on intermediary profits. Expanded employment and supporting businesses could further broaden the tax base. The impact extends beyond brokerage firms.

Higher trading activity could increase STT collections and exchange-related revenues. Greater investor participation could expand demand for portfolio managers, investment advisers, auditors and tax professionals. Their additional revenues could contribute to the Government exchequer.

Market expansion would also require stronger infrastructure. Exchanges, depositories, clearing corporations and technology providers could experience greater demand. This could encourage investment in technology, employment and financial services infrastructure. Such expansion would generate additional taxable economic activity.

SBI Research has separately suggested increasing STT by 50%. It estimates additional collections of approximately ₹45,000 crore in FY 2027-28. This could substantially offset the estimated LTCG revenue loss in case LTCG were to be indeed abolished.

These revenue channels demonstrate a potential multiplier effect. However, they cannot guarantee complete compensation for the revenue loss from LTCG abolition. Higher trading volumes may also encourage speculative transactions. Additional economic activity takes time to translate into government revenue.

Foreign investment and currency

Foreign investors increasingly evaluate India within their broader global investment allocations. Their decisions consider expected returns, associated risks and long-term growth opportunities. Taxation is only one component of this assessment; however, the same could be a showstopper in certain scenarios.

One important thing to consider is – while the domestic investors pay taxes on their home currency gains (INR), foreign investors have to pay taxes on their offshore currency (here as well ‘INR’ for them) gains. So theoretically, foreign investors may be incurring a loss in their domestic currency (say USD, EUR, GBP, etc.) albeit making a profit in INR terms and may end up paying taxes in addition to incurring, potentially, ‘losses’.

On a separate note, consider the prevailing sovereign bond yields. On 3 November 2026, the US ten-year Treasury yield stood at approximately 4.91%. India's corresponding ten-year government bond yield was approximately 7.30%. The apparent difference of nearly 2.4 percentage points may favour India. However, these returns are denominated in different currencies. And where the rupee depreciates by even 3% against the dollar, India's 7.30% yield translates into approximately 4.17% in dollar terms. The US Treasury, meanwhile, offers approximately 4.91% in dollars. The Indian investment also carries additional currency and country risks. This highlights the importance of evaluating returns alongside currency movements, with an objective to strengthen the factors supporting risk-adjusted returns.

Equity markets naturally experience periodic volatility. Unlike government bonds, equities offer no assured returns. India's Nifty 50 had declined approximately 12.28% year-to-date by 29 October 2026. Meanwhile, North Asian markets have attracted capital through their exposure to artificial intelligence-led growth. Higher crude oil prices, increased dollar strength and elevated US Treasury yields have further influenced global allocations.

Indian equity valuations, corporate earnings and currency stability also matter. Continued improvements in earnings visibility and market fundamentals can strengthen investor confidence. Foreign investors continuously compare India's risk-adjusted returns against competing markets. A reduction in LTCG taxation cannot compensate for weak earnings visibility or unattractive valuations; however, it may provide support and generate confidence among investors.

India also has an opportunity to further strengthen its investment environment, with a more simplified overseas remittances mechanism and clearer withholding-tax rules that improve investor confidence.

Conclusion

India's capital markets have significant potential to support its long-term economic ambitions. LTCG rationalisation will come in as an opportunity to strengthen this proposition. Any reform must balance fiscal considerations with market competitiveness.

India need not replicate the tax policies of competing jurisdictions. However, it can adopt measures that encourage long-term investment. A deeper, more active and globally competitive capital market could generate benefits across the economy. The objective therefore extends beyond LTCG collections, and to position India as an attractive destination for sustainable capital formation.

(Dipesh Jain, Partner, and Shivam Rathi, Paralegal, Economic Laws Practice.)