The government is reportedly examining a reduction in long-term capital gains (LTCG) tax and changes to the way foreign investors’ taxable gains are calculated as part of discussions ahead of the Union Budget 2027–28. The measures under consideration seek to improve investor confidence amid prolonged weakness in equity market returns and concerns over overseas fund outflows.

The discussions include lowering the 12.5% LTCG tax rate applicable to the investments under review for domestic and foreign investors, alongside allowing foreign investors to calculate capital gains in dollar terms instead of rupee terms. The report describes ongoing deliberations; it does not announce an approved tax change. 

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Weak Returns Bring Investor Taxation Into Focus

The renewed debate comes against a backdrop of subdued stock market performance, which has affected households that increasingly turned to equities after the pandemic to build wealth and supplement earnings.

The concern, as outlined in the report, extends beyond movements in benchmark indices. Weak investment returns, combined with slow wage growth, can weigh on household confidence, particularly when a larger share of middle-class savings is exposed to the market.

Retail participation has expanded substantially since 2020. Prime Infobase figures cited in the report show that retail investors—defined in the cited dataset as shareholders holding shares worth up to ₹2 lakh—owned 6.58% of NSE-listed companies in March 2020, with holdings valued at ₹7.23 lakh crore.

Their ownership rose to 7.66% in June 2024, when the value of those holdings reached ₹33.16 lakh crore. By March 2026, the corresponding figures had declined to 7.12% and ₹28.97 lakh crore.

The expansion is also reflected in account numbers. The report places CDSL demat accounts at 19.34 crore in September 2026, compared with 2.12 crore in March 2020. Demat account totals, however, should not be treated as a count of unique investors.

Why Dollar-Based Capital Gains Matter

For foreign investors, the discussion concerns both the tax rate and the amount on which tax is calculated.

An overseas investor’s return depends on the performance of the Indian investment as well as changes in the exchange rate. A rise in the rupee value of shares may produce a much smaller gain when the proceeds are converted into dollars. In some circumstances, currency depreciation can eliminate the dollar return entirely.

For illustration, an investor bringing in $100 when the exchange rate is ₹80 to the dollar would invest ₹8,000. If the investment is subsequently sold for ₹8,800, the rupee gain would be ₹800. However, if the exchange rate has moved to ₹88 to the dollar, the sale proceeds would still equal $100.

This hypothetical example shows why foreign investors seek a calculation that accounts for currency movements: an investment can generate a rupee gain without delivering a dollar gain.

Allowing dollar-based computation could therefore reduce the taxable amount in some cases, independently of any reduction in the headline tax rate. The eventual effect would depend on the wording, eligibility conditions and conversion mechanism of any amendment.

Capital Gains Computation Could Require Legislative Changes

The supplied report refers to Section 72 of the Income-tax Act, 2025, which addresses the computation of capital gains, and discusses the restricted availability of foreign-currency computation benefits.

The Act also contains a separate provision, Section 210, dealing with taxation of income earned by Foreign Institutional Investors from securities and gains arising from their transfer. Any proposal for overseas portfolio investors would need to be assessed against the applicable computation rules and their special tax provisions. Income Tax India

The precise scope of the proposal remains significant. A mechanism available to a particular category of non-resident investor cannot automatically be assumed to apply to all foreign investors, all securities or every capital gains transaction.

Similarly, the reported discussion of a 12.5% rate should not be read as suggesting that every category of long-term capital gain is subject to identical conditions, exemptions or effective taxation.

Domestic Fund Support Faces a Test

Another issue highlighted in the report is whether domestic institutional investment can continue to absorb sustained selling by foreign portfolio investors.

Domestic mutual funds have provided an important source of demand during periods of overseas selling. However, prolonged market weakness can test the assumption that local inflows will consistently offset large foreign withdrawals.

The policy debate consequently involves retaining household confidence while making Indian equities more attractive to international investors. A tax reduction could improve post-tax returns, although its effect on fresh investment would also depend on valuations, corporate earnings and global financial conditions.

SBI Report Calls for Longer Holding Period and LTCG Relief

The article also cites State Bank of India’s October 12 Ecowrap report, which advocated examining the abolition of LTCG tax on equities alongside a longer holding period of around two to three years.

The suggestion links tax relief with an incentive to retain investments for longer. Its underlying policy objective is to encourage more durable equity capital rather than rely heavily on short-term portfolio movements.

This remains a recommendation cited in the report, separate from any government decision on the Budget.

Tax Policy Forms Part of a Wider Investment Challenge

Taxation is only one of the factors influencing overseas investment decisions. The report also identifies concerns about Indian equity valuations, interest rates in developed markets and the availability of investment opportunities linked to artificial intelligence.

Its discussion of SBI’s assessment places regulatory stability and policy clarity alongside computing infrastructure, reliable electricity and skilled workers as factors that can influence the destination of future capital.

A more favourable capital gains regime may strengthen India’s investment appeal, but its effectiveness would depend on how it interacts with these wider economic and business conditions.

Budget Decision Awaited

Finance Minister Nirmala Sitharaman’s reported willingness to hear views on LTCG tax and Securities Transaction Tax has added momentum to the debate. However, an openness to discussion does not establish that a particular proposal will be adopted.

The central questions ahead of Budget 2027–28 are whether the government will reduce the LTCG rate, introduce currency-adjusted computation for eligible foreign investors, or combine relief with revised holding-period conditions.

For investors, the distinction remains crucial: the measures described are proposals under discussion, and their scope, commencement date and legal effect would depend on the final Budget announcements and any resulting legislation.

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