Overview: India’s equity taxation is under renewed scrutiny as foreign portfolio investor (FPI) outflows continue. Jefferies has outlined three possible changes to capital gains taxation, including lower rates and dollar-based gain calculations. Separately, PHDCCI has urged the government to abolish equity LTCG tax and reduce other market levies. However, no tax reduction has been announced.
Sustained foreign selling has renewed concerns about India’s appeal to overseas investors. The debate over equity taxation has gained attention ahead of the next Union Budget, with industry bodies and market participants seeking changes to improve investment sentiment.
Global investment banking firm Jefferies, has reportedly outlined three possible changes to India’s equity tax regime to improve its appeal to foreign investors. The proposals come amid sustained FPI outflows and growing calls for lower capital gains taxes. Separately, PHDCCI has urged the government to ease the tax burden on equity market investors ahead of the next Union Budget.
Why Equity Tax Changes Are Being Discussed
FPIs withdrew $21 billion from Indian equities in Financial Year 2025-26 and another $16.5 billion up to 23 October in FY 2026-27. In its 28 October 2026 report, Jefferies outlined three possible approaches to equity taxation:
- Reduce Long-Term Capital Gains (LTCG) and Short-Term Capital Gains (STCG) tax rates for all investors.
- Introduce a lower LTCG tax rate specifically for FPIs.
- Allow FPIs to calculate capital gains in US dollars, potentially providing an indexation-like benefit.
Jefferies believes lower equity taxes could improve foreign investor sentiment and support the rupee. It cited $9 billion in FPI debt inflows during June and July 2026 following tax relief for eligible foreign investors in government securities.
That exemption was originally introduced through the Income-tax (Amendment) Ordinance 2026. It was later retained under the Taxation and Other Laws (Amendment) Act 2026, covering eligible interest and gains from specified government securities, but not equity investments.
Section 210 of the Income-tax Act 2025 provides the special tax computation framework for Foreign Institutional Investors (FIIs). Qualifying short-term equity gains under Section 196 are taxed at 20%, while qualifying long-term gains under Section 198 exceeding ₹1.25 lakh are taxed at 12.5%. For listed equity shares, the concessional rates are subject to applicable Security Transaction Tax (STT) conditions, including STT on acquisition and transfer for LTCG and on transfer for STCG, subject to statutory exceptions.
PHDCCI Seeks Wider Capital Market Tax Relief
The PHD Chamber of Commerce and Industry (PHDCCI) has written to Central Board of Direct Taxes (CBDT) Chairman Ravi Agrawal, seeking changes to equity taxation. Its recommendations include:
- Abolishing LTCG tax on listed equities.
- Extending the holding period for long-term treatment from 12 months to 18 to 24 months.
- Reducing STCG tax from 20% to 10%, or alternatively lowering STT.
PHDCCI argues that a lower tax burden could help retain foreign capital and encourage investment in Indian markets.
Finance Minister Nirmala Sitharaman also addressed the issue at an Economy Forum in New Delhi. She said the government was willing to hear views on LTCG and STT during Budget consultations but made no commitment to any change.
Revenue Impact May Limit Relief
Tax reductions could affect government revenue. Jefferies estimated equity LTCG collections at around ₹1.3 lakh crore in FY 2024-25, while STT collections were running at an annualised rate of approximately ₹85,000 crore in FY 2026-27. Together, the two levies accounted for 8% of direct tax collections and 5% of gross tax revenue in FY 2024-25. This revenue impact could limit the scope for tax concessions.
Setindiabiz Support
Foreign portfolio investment in listed securities is different from foreign direct investment (FDI) in Indian businesses. Companies entering India through FDI must follow the applicable FEMA framework, including entry routes, sectoral caps, pricing rules and RBI reporting requirements.
Setindiabiz supports global enterprises and Indian subsidiaries with subsidiary setup, end-to-end corporate incorporation, GST registration, annual corporate reporting, and full FDI regulatory compliance, including RBI and FEMA compliance filings such as mandatory FC-GPR and FC-TRS reporting.
FAQs
No. Jefferies has outlined possible options and PHDCCI has submitted recommendations, but no tax reduction has been approved.
Proposed options by Jefferies include an across-the-board reduction in LTCG and STCG rates, a lower LTCG rate for FPIs, and calculating FPI gains in US dollars.
The applicable rates are generally 20% for qualifying STCG and 12.5% when qualifying LTCG exceeds ₹1.25 lakh, subject to statutory conditions.
The proposals have brought India’s equity taxation into focus, but they remain recommendations rather than policy changes. Existing tax provisions will continue to apply unless the government formally amends them.
