Budget 2027-28: FM Weighs LTCG Tax Cut, Dollar-Based Taxation for Foreign Investors

The government is considering a reduction in long-term capital gains (LTCG) tax and a shift to dollar-based calculations of capital gains for foreign investors ahead of the Union Budget 2027-28, as policymakers look for ways to revive stock market sentiment and attract overseas capital amid a prolonged period of weak returns.

Discussions within the government include lowering the current 12.5% LTCG tax rate for domestic and foreign investors and allowing foreign portfolio investors (FPIs) to calculate taxable gains in dollar terms rather than rupees, according to officials familiar with the deliberations.

The discussions come against the backdrop of a largely stagnant equity market over the past two years, subdued wage growth and concerns that persistent foreign capital outflows could weaken investor confidence further.

Weak Market Returns Raise Concerns Over Retail Investors

One of the government’s key concerns is the impact of poor stock market performance on household finances and consumer sentiment. With many investors experiencing little or no returns, or losses, over the past two years, the market slowdown has added to concerns about weak wage growth and pressure on middle-class households.

Retail participation in Indian equities increased sharply after the Covid-19 pandemic, as individuals sought to diversify their savings and supplement regular income through investments.

Data sourced from Prime Infobase show that retail shareholding in NSE-listed companies increased from 6.58% in March 2020, valued at ₹7.23 lakh crore, to 7.66% in June 2024, valued at ₹33.16 lakh crore. By March 2026, the share had declined to 7.12%, with holdings valued at ₹28.97 lakh crore.

The number of demat investor accounts with the Central Depository Services (India) Ltd (CDSL) also expanded significantly, rising from 2.12 crore in March 2020 to 19.34 crore in September 2026.

The growing participation of individual investors has made equity market performance an increasingly important factor in household investment sentiment.

Foreign Investor Outflows Put Pressure on Markets

A second concern is the weakening confidence that domestic mutual fund inflows can consistently offset large-scale withdrawals by foreign portfolio investors.

For much of the decade leading up to 2024, domestic institutional investors often absorbed shares sold by foreign investors, helping cushion the impact of overseas outflows. That pattern has come under pressure as foreign investors reassess their exposure to Indian equities.

Market participants have cited several factors behind the reluctance of overseas investors to commit fresh capital, including the limited availability of major artificial intelligence-related investment opportunities, concerns over elevated stock valuations despite corrections and rising interest rates in developed economies.

Against this backdrop, India’s capital gains tax structure has emerged as another point of contention.

Why Foreign Investors Want Dollar-Based Taxation

Foreign investors argue that India’s 12.5% LTCG tax is relatively high compared with capital gains tax arrangements in some competing markets, including China, Indonesia and Brazil, where certain categories of gains may face no tax or relatively low rates.

Another concern is the requirement to calculate taxable gains in rupees. Currency depreciation can increase the rupee value of an investment even when the investor’s gain in dollar terms is substantially smaller or negative.

For example, an overseas investor may sell an Indian asset for more rupees than originally invested but receive little or no gain in US dollar terms because the rupee has weakened during the holding period.

Under the current framework described in the Income-tax Act, 2025, Section 72 sets out the method for computing capital gains by deducting eligible transfer expenses, acquisition costs and improvement costs from the consideration received.

Section 72(6) provides currency-conversion relief for non-residents transferring unlisted shares or debentures of Indian companies, helping prevent notional gains arising from rupee depreciation. However, the provision does not extend the same relief to listed equity investments and excludes domestic investors and FPIs from this specific benefit.

The government’s reported consideration of dollar-based taxation for foreign investors would therefore represent a potential change in how certain cross-border investment gains are calculated.

Government Has Already Taken Steps to Attract Foreign Capital

The discussions follow an earlier move to make Indian government bonds more attractive to overseas investors.

On June 5, 2026, the government reportedly removed withholding tax and long- and short-term capital gains taxes on foreign investors’ investments in government bonds.

Before the change, foreign investors faced a 12.5% tax on long-term capital gains, a 30% rate on short-term capital gains and withholding tax of around 20% on interest income from government bond holdings.

The move formed part of efforts to attract overseas funds and strengthen demand for Indian debt. A possible easing of equity taxation would extend the broader debate to the stock market, where foreign investor flows can influence valuations, liquidity and the rupee.

SBI Calls for Review of Equity Capital Gains Tax

The State Bank of India has also called for a reassessment of the taxation framework governing equity investments.

In its Ecowrap research report dated October 12, SBI said the government should consider measures to anchor short-term capital flows into equities, including extending the holding period to two or three years and abolishing LTCG tax on equity investments.

Such a move could encourage longer holding periods, although its effect on trading activity, government revenue and market participation would depend on the final structure of any changes.

The report also highlighted the importance of India’s ability to attract capital into emerging growth sectors, particularly artificial intelligence.

Soumya Kanti Ghosh, SBI’s Group Chief Economic Adviser, argued that recurring episodes of capital outflows warranted a broader examination of India’s positioning in the global investment landscape.

Artificial intelligence is increasingly shaping expectations about productivity, profitability and technological leadership, the report said, making policy certainty an important factor in attracting investment alongside computing capacity, reliable power and skilled labour.

Sitharaman Says LTCG Debate Is Healthy

Finance Minister Nirmala Sitharaman has also acknowledged the ongoing debate over capital gains taxation.

Earlier this month, she described the discussion around LTCG as “healthy” and said she was keen to hear different perspectives.

Speaking at the Bloomberg New Economy forum, she noted that both domestic and foreign investors had raised questions about LTCG and the Securities Transaction Tax (STT).

The debate over market taxation and the treatment of different asset classes, she said, had become a widely discussed issue.

Her remarks come as investors seek greater clarity on the government’s approach to market taxation and policymakers assess how the existing framework affects investment decisions.

What Could a Tax Cut Mean for Indian Markets?

A reduction in LTCG tax or the introduction of dollar-based gain calculations for eligible foreign investors could improve the attractiveness of Indian equities, particularly for overseas funds sensitive to currency movements and after-tax returns.

However, the impact would depend on the details of any proposed changes, including eligibility, holding-period requirements and the treatment of gains and losses. Tax concessions alone may not be sufficient to reverse foreign outflows if investors remain concerned about valuations, interest rates or India’s exposure to fast-growing technology sectors.

For domestic investors, a lower LTCG rate could improve post-tax returns, but it would also raise questions about government revenue and the balance between encouraging investment and maintaining a stable tax framework.

With the Union Budget 2027-28 approaching, the central challenge for policymakers is to restore confidence without creating uncertainty over future tax rules.

Whether the government ultimately changes capital gains taxation remains unclear. The discussions nevertheless indicate that investor sentiment, foreign capital flows and India’s ability to compete for global investment are becoming increasingly important considerations in the run-up to the next Budget.