Government Reviews Capital Gains Tax and STT as Foreign Investors Pull Money Out of Indian Shares
The Union government has started reviewing two taxes on the share market: the long-term capital gains (LTCG) tax and the securities transaction tax (STT).
It has asked investors, market intermediaries (brokers, fund houses) and tax experts for their views. No change has been announced yet; the existing rules continue.
The trigger is heavy selling by foreign portfolio investors (FPIs). As of early October 2026, FPIs had taken out more than ₹3 lakh crore from Indian shares in 2026, compared with about ₹1.66 lakh crore in the whole of 2025.
Some experts argue that India's taxes make Indian shares less attractive than markets such as the US, UK, Singapore and Hong Kong, where foreign investors generally do not pay capital gains tax on listed shares.
Ideas being discussed include exempting FPIs from capital gains tax while adjusting STT so that tax revenue does not fall, and letting foreign investors calculate gains in US dollars rather than rupees.
The government also has to think about lost revenue and about keeping the same tax rules for Indian and foreign investors. The Union Budget 2027-28 is seen as the likely place for any change.
Capital Gains Tax in India: Long-Term and Short-Term Capital Gains
Capital gains tax is the tax you pay on the profit you make when you sell something valuable, such as shares, a house, gold or mutual fund units, for more than you paid. If you buy shares for ₹1 lakh and sell them for ₹1.5 lakh, your capital gain is ₹50,000, and that profit is taxed. India splits these profits into short-term and long-term gains, depending on how long you held the asset, and taxes them at different rates.
The government is now asking whether the 12.5% LTCG rate, and the way FPI gains are calculated in rupees, are pushing foreign investors out at a time of record selling. Any change would most likely come through the Budget for 2027-28, and it would have to balance attracting foreign money against lost revenue and fair treatment of Indian investors.
Securities Transaction Tax (STT)
The Securities Transaction Tax (STT) is a small tax charged on the value of each trade in shares, derivatives and equity mutual fund units done through a recognised stock exchange. It is charged whether you make a profit or a loss. The stock exchange (or the mutual fund) collects it automatically at the time of the trade and pays it to the government. It is a direct tax, managed by the Central Board of Direct Taxes (CBDT).
STT is the second tax under review. Because it is charged on every trade, it raises the cost of investing for foreign funds that trade often. One option being discussed is to exempt FPIs from capital gains tax and adjust STT to make up the lost revenue.
Foreign Portfolio Investment (FPI): How Foreign Money Flows Into Indian Markets
Foreign Portfolio Investment (FPI) is money that foreign investors put into Indian financial assets such as shares and bonds. They want returns; they do not want to control the companies. Because they can buy and sell quickly, FPI money can come in fast and leave just as fast, which moves share prices and the rupee.
The large FPI exit is the main reason the government is rethinking LTCG and STT. When FPIs sell heavily, share prices fall and the rupee weakens, so the government is checking whether lower or simpler taxes could help bring foreign money back.
- FPI net outflow from Indian equities in 2026: over ₹3 lakh crore (as of early October 2026); 2025 full year: about ₹1.66 lakh crore
- LTCG on listed shares: 12.5% above ₹1.25 lakh a year; STCG: 20% (since 23 July 2024)
- Effective top LTCG rate on listed shares with surcharge and cess: nearly 15%
- STT on equity delivery: 0.1% on each side; futures: 0.05%; options: 0.15% (from 1 April 2026)
- STT introduced: 1 October 2004 (Finance (No. 2) Act, 2004)
- LTCG on listed equity reintroduced: Finance Act, 2018 (Section 112A), grandfathering to 31 January 2018
- Income-tax Act, 2025 in force from 1 April 2026; LTCG on listed equity now in Section 198
- LTCG collections: ₹1.29 lakh crore (2024-25); STT collections: ₹57,522 crore (2025-26)
- Next Union Budget: 2027-28