LTCG Tax Removal in India: Impact on FPIs and Investors
LTCG tax on listed shares and equity mutual funds has not been removed. LTCG tax removal in India is under discussion after Finance Minister Nirmala Sitharaman addressed investor concerns about long-term capital gains (LTCG) tax and Securities Transaction Tax (STT) on October 13, 2026. SBI Research has recommended abolishing LTCG tax on equities and extending the holding period to two or three years to encourage longer-term investment. Separately, the mutual fund industry has called for removing STT on specified securities transactions. Currently, eligible long-term gains from listed equity shares and equity-oriented mutual funds exceeding ₹1.25 lakh are generally taxed at 12.5%, subject to applicable conditions. However, the government has not announced any decision to remove either tax.
Why Is LTCG Tax Removal in the News?
The debate around long-term capital gains (LTCG) tax and Securities Transaction Tax (STT) gained attention after Finance Minister Nirmala Sitharaman spoke about investor concerns at the Bloomberg New Economy Forum in New Delhi on October 13, 2026.
Investors in India and overseas have been discussing the taxation of capital gains, STT and whether different asset classes should be taxed on similar lines. Sitharaman acknowledged that these discussions were taking place but did not commit to removing or reducing either tax. She said it was too early to indicate what the government might consider because preparations for the upcoming Union Budget were underway.
The timing is significant because foreign portfolio investors (FPIs) have been selling Indian equities amid global economic uncertainty, currency pressure and competition from other markets.
What Are the Key Proposals on LTCG Tax and STT?
SBI Research, in its Ecowrap report, has recommended removing long-term capital gains (LTCG) tax on equities and extending the qualifying holding period from one year to two or three years. The aim is to encourage longer-term investment and make Indian equities more attractive to investors.
Separately, the Association of Mutual Funds in India (AMFI), in its Union Budget 2026–27 recommendations, has called for removing Securities Transaction Tax (STT) on specified purchase and sale transactions, including mutual fund units. STT is applied to eligible transactions, while LTCG tax applies to qualifying profits when investments are sold. The debate around LTCG tax and STT also raises questions about their impact on investors, trading costs and foreign investment. These aspects are explored further in this Outlook Money report on LTCG tax and STT.
Both proposals seek to review the tax burden on investors, but they come from different organisations and are not government-approved changes.
What Is the Difference Between LTCG Tax and STT?
Although both taxes affect securities transactions, they work differently.
Long-term capital gains tax (LTCG) is charged on eligible profits earned when an investor sells an investment after the applicable long-term holding period. For specified listed equity shares and equity-oriented mutual fund units, the current framework generally taxes eligible gains exceeding the annual exemption threshold at the applicable LTCG rate.
Securities Transaction Tax (STT) is charged on specified securities transactions. It is linked to the transaction value rather than the profit earned. Consequently, STT can apply even when a transaction does not result in a gain. The applicable rate and who pays it depend on the type of transaction.
LTCG Tax Removal: Key Numbers
| Indicator | Figure or development |
| Equity LTCG tax | 12.5% on eligible gains exceeding ₹1.25 lakh |
| FPI equity outflows in 2026 | ~ ₹3.08 lakh crore |
| FPI equity outflows in 2025 | ~ ₹1.66 lakh crore |
| Equity LTCG tax collections | ₹1.29 lakh crore, compared with ₹72,249 crore a year earlier |
| STT on futures | Rose from 0.02% to 0.05% |
| Government’s position | Open to hearing views, with no commitment to tax changes |
Sources: NSDL, Finance Ministry
LTCG Tax And STT: History and Market Response
Before 2018, qualifying long-term gains from listed equity shares and equity-oriented mutual funds were generally exempt from tax, subject to applicable conditions. The Union Budget 2018–19 reintroduced LTCG tax on eligible gains exceeding ₹1 lakh at 10%. In the Union Budget 2024, the rate increased to 12.5%, while the annual exemption threshold rose to ₹1.25 lakh for qualifying transfers made on or after July 23, 2024.
STT has also changed over time. The government increased STT on specified futures and options transactions in the 2024 and 2026 Budgets, affecting transaction costs for market participants.
How Did the Market Move Around Budget Dates?
| Date | Nifty 500 Closing Level | One-day change (Nifty 500) | |
| February 1, 2018 | 9,687 | -0.10% | LTCG reintroduced: 10% on gains above ₹1 lakh/yr (>12 months) |
| July 23, 2024 | 22,865 | -0.30% | LTCG raised to 12.5%, exemption ₹1.25 lakh; Also raised STT* |
| February 1, 2025 | 21,582 | 0.00% | None (LTCG unchanged) |
| February 1, 2026 | 22,611 | -2.00% | LTCG unchanged; |
*The July 23, 2024 Budget also raised the Securities Transaction Tax (STT) on futures and options, a separate levy from capital gains tax. STT on futures rose from 0.0125% to 0.02%, and STT on options premium rose from 0.0625% to 0.10%, an increase of about 60% in each case, effective October 1, 2024.
After the Budget raised LTCG tax and STT, the Nifty fell nearly 1.8%, then recovered.
Budget-day moves reflect many things at once: earnings expectations, fiscal and growth signals, global cues, foreign fund flows and other announcements.
Can LTCG Tax Removal Bring FIIs Back to India?
Foreign institutional investors (FIIs), commonly referred to as foreign portfolio investors (FPIs), invest in Indian equities and other financial assets. Their buying and selling can influence market liquidity, share prices and currency movements.
Foreign investors have pulled a record ₹3.08 lakh crore out of Indian equities in 2026, against ₹1.66 lakh crore in all of 2025, according to NSDL data reported on October 12. There are multiple factors driving selling, including global factors such as higher US bond yields, costlier crude oil ,a stronger dollar, and the movement of money towards AI-focused markets such as the US, Taiwan and South Korea. LTCG Tax relief could help at the margin, but it may not bring foreign investors back on its own.
If the government tied the relief to a two-to-three-year holding period, as SBI Research has proposed, some investors might hold qualifying investments for longer. Also, a reduction in STT could make India’s derivatives market more competitive and help retain trading activity within the country.
Impact on Indian Investors and Government Revenue
Domestic investors could benefit if the government removes LTCG tax on qualifying equity investments. They would retain a larger share of eligible realised profits, subject to the scope and conditions of any future change. Similarly, reducing or removing STT could lower transaction costs.
LTCG and STT have become a significant source of government revenue. Collections from equity LTCG stood at ₹1,29,158 crore in AY 2025-26, compared with ₹72,249 crore in AY 2024-25. The government reported total collections of ₹2.01 lakh crore over these two years.
STT collections have also reached ₹40,214.36 crore between 1 April and 17 September 2026, compared with ₹26,305.72 crore during the same period a year earlier. Total collections were ₹57,522 crore in FY26 and ₹53,296 crore in FY25.
Removing or reducing a tax could lower government receipts from the transactions or gains covered by the change.
The government would need to weigh this against possible benefits, such as improved investment participation and more stable capital inflows.
Will the Upcoming Budget Remove LTCG Tax or STT?
At present, there is no such proposal under consideration. The Finance Minister’s remarks have brought the taxation of capital gains and securities transactions into the Budget discussion, but she has not committed to removing or reducing either tax.
The upcoming Union Budget will clarify whether the government proposes any changes. Investors should look for details on the assets and transactions covered, eligibility conditions, holding periods, revised tax rates and the effective date of any amendment.
Until an official announcement is made, LTCG tax and STT should be treated as part of an ongoing policy debate, not as taxes confirmed for removal.