Equity taxation has re-entered the policy conversation after Finance Minister Nirmala Sitharaman opened the door to receiving investor feedback on scrapping the long-term capital gains tax through the Budget consultation process, a development that coincides with an ongoing stretch of net outflows by foreign portfolio investors from Indian markets.

At the Bloomberg New Economy Forum in New Delhi on Tuesday, Sitharaman noted that queries from both domestic and overseas investors had centred on the long-term capital gains levy, the securities transaction tax, and the question of whether different asset classes ought to be treated consistently under the tax framework.

Those remarks came against a backdrop of active debate over how India taxes equity investments, with SBI Research among the voices pushing for the long-term capital gains levy on stocks to be scrapped and the qualifying holding window stretched to two or three years — a shift its proponents argue would draw more patient, sustained capital into the market.

No formal announcement of the tax's abolition emerged from the finance minister's remarks. Responding to a parliamentary question on 20 July, Finance Minister of State Pankaj Chaudhary confirmed that the government had not taken up any plan to remove the long-term capital gains tax for either domestic or retail investors.

Sitharaman pointed out that how equity investments ought to be taxed had drawn questions from both local and foreign investors. The minister indicated that the budget consultation process remained open to a range of viewpoints, noting that the long-term capital gains tax had drawn commentary from both domestic and overseas investors, while questions around the securities transaction tax and whether different asset classes warrant uniform treatment had also generated considerable discussion.

The long-term capital gains tax — commonly abbreviated as LTCG — takes effect on qualifying gains from assets held beyond the period set out in the relevant regulations. Unlike other levies, the securities transaction tax applies only when a transaction involves a qualifying security. Any adjustment to either levy would affect how investors calculate their costs and reshape the expense of participating in financial markets.

Sitharaman pointed to the expanding footprint of private investment across newer industries, noting that the scope extended well beyond artificial intelligence to encompass semiconductor chips, their design, and the packaging stage of production. She noted that the country was positioning itself within sectors expected to drive artificial intelligence forward.

Calls to revisit equity taxation have resurfaced, yet the administration has stated its position — scrapping the long-term capital gains levy for domestic and retail investors is not under consideration. Responding to a Lok Sabha query on 20 July, Chaudhary told the house that no such proposal was under active consideration by the government.

Capital gains tax rates and related fiscal measures undergo periodic review as part of the annual Budget cycle, he noted, with broader economic conditions factored into any legislative adjustments. Chaudhary noted that domestic and retail investors face a long-term capital gains tax rate of 12.5 per cent on equity returns — a figure that matches what foreign portfolio investors are charged under the same framework.

A dedicated tax exemption covering foreign portfolio investors who channel funds into government securities has been put in place. Equity holdings, however, fall outside the scope of what the measure covers.

Under the Income-tax (Amendment) Ordinance, 2026 — issued the previous month — certain holdings by foreign portfolio investors in government securities were granted relief from tax liability on both interest earnings and capital gains. Starting 1 April 2026, any interest or capital gains that foreign portfolio investors earn from holdings in government securities became covered by the exemption.

The policy shift, Chaudhary explained, was designed to position the country's tax framework on a more competitive footing globally while drawing in foreign investment of a durable, long-term nature. Pension funds, insurance companies, and sovereign wealth funds are among the institutional investors the policy is designed to draw in, according to the government's projections. The measure additionally draws the tax treatment of government securities into closer alignment with the approach taken in peer jurisdictions.

Any relief on offer applies solely to government securities, leaving the long-term capital gains tax treatment of equity investments unchanged.

A push from SBI Research to eliminate the long-term capital gains levy on equities rests on the premise that doing so would draw overseas investment and lift confidence among market participants. The State Bank of India's in-house research arm, in its Ecowrap publication, put forward a proposal to extend the minimum holding period for equity investments to between two and three years, alongside the removal of the long-term capital gains tax on such assets, with the report noting that anchoring speculative capital flows into the equity segment would require both measures.

Monetary tools and foreign exchange operations deployed by the Reserve Bank of India are unlikely on their own to resolve the pressures weighing on the rupee, according to analysis from SBI Research. Among its proposals were policy-level adjustments designed to draw greater investment into Indian equity markets.

The document pointed to a pattern of sustained foreign portfolio investor withdrawals from Indian equity markets, with net outflows surpassing ₹2.61 lakh crore across 2026 on top of ₹1.66 lakh crore that left the market during 2025. The report's authors recommended that policymakers consider measures to stabilise short-term capital movements in the equity segment — where roughly $13 billion departed in FY27 — through a combination of investment theme alignment and potential adjustments on the taxation and capital gains front.