Editorial     

Published: October 31, 2026
Updated: October 31, 2026

Axe LTCG tax, boost investment sentiment

Sources close to the Union finance ministry have indicated that the government is considering a proposal to abolish long-term capital gains (LTCG) tax on securities and is also planning to reduce the rate of securities transaction tax (STT). Although there has been no official announcement, these sources point out that the measure may be announced in the forthcoming budget (FY 2027-28). While domestic investors in the stock market have perforce to accept these imposts, foreign investors have baulked at what they see as an ‘unnecessary’ and ‘arbitrary’ decision of the Indian tax authorities.

In many countries, including the US, Germany, and Hong Kong, there is no capital gains tax, generally speaking. By contrast, India, which is now a major global economic power, has a 12.5% LTCG tax. This has led foreign investors to pull out funds from India and invest the same in other countries, among whom China is their biggest suitor. In fiscal 2026, foreign investors withdrew as much as Rs 3 lakh crore from the Indian stock market, and the withdrawal continues this year too.

On the flip side, the equity cult has been spreading far and wide in India. In 2020, there were 20 million demat account holders in the country, while today the figure has reached a humongous 200 million – that is, one out of every six or seven Indians!

INVESTOR GLOOM

But these shareholders have started worrying as the stock market has turned depressed on account of growing global geopolitical tensions and sharply increasing Indian inflation. To compound the gloom, there has been a sharp drop in employment opportunities in the country due to, among other factors, poor fiscal management. Savings and investments are on the decline, and a lacklustre stock market with a downward inclination in prices is dampening the retail investment climate.

During the last two years, the BSE Sensex has nosedived from around 79,000 in October 2024 to around 73,000 in October this year – that is, a fall of around 7.3 per cent. This, at a time when US Nasdaq stocks have given returns of 43 per cent, South Korean investors have got returns of over 100 per cent, and investors in China and Hongkong have seen their portfolios appreciate by 10-11 per cent. Clearly, if the Indian government does not take steps to make investment in stocks attractive, the country’s equity cult may not only stop growing but may even start declining.

ALL-ROUND EFFECTS

This situation has implications not only for stock market investors but also for household savings, capital formation, foreign investment, government revenues and economic growth.

Any dilly-dallying by the government on axing LTCG tax may have negative implications for both retail investors and the economy at large. As a matter of fact, abolition of LTCG tax and reduction in STT would make equity investment more attractive, encourage long-term investment and deepen India’s capital markets. The period for availing of this LTCG benefit could perhaps be increased from one year to two years.