The government is reportedly considering reducing the 12.5% long-term capital gains tax and introducing dollar-based taxation for foreign investors to revive stock market sentiment and attract overseas investment.
Highlights
- Government discussing possible LTCG tax reduction ahead of Budget 2027-28.
- Current long-term capital gains tax rate stands at 12.5%.
- Dollar-based capital gains taxation for foreign investors is under consideration.
- Weak stock market returns and slow wage growth have raised concerns.
- CDSL demat accounts reached 19.34 crore in September 2026.
- SBI has recommended abolishing LTCG tax on equity investments.
Budget 2027: Government Considers Capital Gains Tax Cut to Revive Stock Market Sentiment
The Union government is reportedly examining proposals to reduce long-term capital gains (LTCG) tax and introduce dollar-based taxation for foreign investors as part of discussions ahead of Budget 2027-28.
According to a report by The Indian Express, the proposals are being considered amid concerns over weak stock market returns, sluggish wage growth and declining foreign investment flows.
The government is discussing whether the existing 12.5% LTCG tax rate should be reduced for domestic and foreign investors. Another proposal involves allowing foreign investors to calculate capital gains in US dollar terms rather than Indian rupees.
However, no final decision has been announced.
Why Government Is Considering Tax Changes
Officials have identified two major concerns behind the discussions.
First, Indian stock markets have delivered limited or negative returns over the past two years, affecting investor sentiment. This has become particularly significant as more middle-class households participate in equity markets to supplement their income.
Second, domestic mutual fund investments have not always been sufficient to offset large-scale selling by foreign portfolio investors.
The government is exploring measures that could improve market confidence and attract additional investment.
Retail Investor Participation Rises Sharply
Retail participation in India’s stock markets has increased significantly since the Covid-19 pandemic.
According to Prime Infobase data cited in the report, retail shareholding in NSE-listed companies increased from 6.58% in March 2020 to 7.66% in June 2024 before declining to 7.12% in March 2026.
The value of retail holdings stood at ₹28.97 lakh crore in March 2026, compared with ₹7.23 lakh crore in March 2020.
Meanwhile, CDSL demat accounts increased from 2.12 crore in March 2020 to 19.34 crore in September 2026.
Dollar-Based Taxation for Foreign Investors
One proposal under discussion would allow foreign investors to calculate taxable capital gains in dollar terms.
Currently, foreign portfolio investors generally pay capital gains tax based on rupee-denominated gains. Currency depreciation can therefore create additional tax complications for overseas investors.
Allowing dollar-based calculations could reduce the impact of exchange-rate movements on their taxable investment returns.
SBI Recommends Removing LTCG Tax
In its October 12 Ecowrap report, State Bank of India recommended that the government consider abolishing long-term capital gains tax on equity investments.
The report also suggested extending the holding period to two or three years to encourage more stable foreign investment.
Earlier this month, Finance Minister Nirmala Sitharaman acknowledged the ongoing debate over LTCG tax and Securities Transaction Tax (STT), describing discussions around market taxation as important.
Any reduction in capital gains tax would require a formal government decision. For now, the proposals remain under discussion ahead of Budget 2027-28.
Source: Indian express
