The Indian government on Monday told Parliament that there is no move at present to abolish the long-term capital gains (LTCG) tax on equities for retail or domestic investors, according to a statement by Minister of State for Finance Pankaj Chaudhary in the Lok Sabha. The tax rate of 12.5% applies uniformly to domestic retail investors and Foreign Portfolio Investors (FPIs) for equity investments, the minister clarified, ending market speculation ahead of the budget process beginning in December.
Government Clarifies LTCG Tax Policy
"The tax policies, including capital gains tax rates, are revised periodically as part of the annual budgetary process and legislative revisions after taking into consideration the macroeconomic parameters," Chaudhary said in response to a parliamentary question. The statement addresses growing demands from investors for changes to the LTCG tax, which gained traction after the Centre amended rules to attract overseas investments in government securities (g-secs). The minister’s remarks effectively put an end to speculation until the next budget exercise begins in December, according to the source.
Rationalisation for Foreign Investors in Government Securities
The minister clarified that the government decided to rationalise the tax treatment for FPIs investing in g-secs by exempting such investments from income tax on any interest or capital gain. This move, he said, will align the taxation on g-secs with many comparable jurisdictions and ensure durable inflows from long-term investors. The Centre undertook an overhaul of the capital gains structure in recent years, bringing all asset classes on a par. However, overseas investors have continued to demand changes to the equity tax structure, arguing that the government imposes both LTCG tax and securities transaction tax, making India uncompetitive compared with other markets.
Implications for Corporate Treasuries and Investors
For CFOs, treasury directors, and finance executives, the government’s stance means stable capital gains tax treatment for equity investments in the near term. The LTCG tax rate of 12.5% remains unchanged for both domestic and foreign investors in equities, affecting after-tax returns on equity holdings and influencing portfolio allocation decisions. The exemption for FPIs in g-secs, however, creates a tax asymmetry: FPIs can now earn interest and capital gains on g-secs tax-free, while equity gains remain taxable. This may encourage a shift in foreign capital flows toward government securities, potentially lowering sovereign borrowing costs over time. For trade finance professionals and economic analysts tracking India’s cost of capital, the tax rationalisation for g-secs could improve the country’s attractiveness for long-term fixed-income investment, while the unchanged equity tax keeps the stock market under some competitive pressure relative to other emerging markets. Investors must continue to account for the combined LTCG and securities transaction tax costs in their India equity strategies.
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