India once had no LTCG tax: How income tax rules on LTCG, STCG and STT changed over the years
Long-term capital gains (LTCG) tax is back in focus after Finance Minister Nirmala Sitharaman expressed interest in hearing views on the levy, which, along with the Securities Transaction Tax (STT), is viewed by experts as a twin blow for market participants.
While acknowledging the significance of the LTCG tax and STT for market investors, FM Sitharaman said: “We are very close to the budget, and the preparation for the budget has started, and it may not be the best time for me to say what I will or what I will not consider.” This has since fuelled calls for a cut in the LTCG tax rates.
SEBI has also reportedly joined calls for LTCG tax relief. Reuters reported that the markets regulator has recommended the government remove the LTCG tax imposed on foreign investors and domestic mutual fund investors.
With Union Budget 2027 a couple of months away, here's a look at how LTCG has changed and a throwback to when these long-term gains were tax-free.
Under the Income-tax Act, 1922, the LTCG tax was introduced in India. However, its initial run was short-lived, and in 1949, the government abolished it as the levy had an adverse impact on stock market transactions.
Then Finance Minister John Mathai, in his budget speech, noted: "In the field of direct taxation, my first proposal is to abolish the Capital Gains Tax. At the time this tax was introduced, it was expected to yield a large revenue, but it synchronised with a period of falling values and the yield from this tax has, in consequence, been small... In present circumstances, I consider the retention of this tax ill-advised."
In 1956, the capital gains tax was introduced again by then finance minister TT Krishnamachari. He argued, “It is only fair that the exchequer should get a proportion of these incomes when realised in the form of capital gains.”
Over the next few decades, the government introduced various deductions and exemptions to cushion the impact of capital gains tax on taxpayers. A notable reform was introduced in 1986-87 by then Finance Minister VP Singh, who introduced a 50% deduction on long-term capital gains from buildings, land and 60% deduction on gains from other assets. He further increased the ₹5,000 exemption limit to ₹10,000.
In 1992, then Finance Minister Dr Manmohan Singh introduced indexation benefits, acknowledging that the tax system didn't account for inflation. "The Chelliah Committee has suggested a system of indexation to take care of the problem and I propose to accept its recommendation," Finance Minister Singh said in his Budget speech. The Chelliah Committee or the Tax Reform Committee was set up under the chairmanship of Professor Raja J. Chelliah to review and restructure direct and indirect taxation systems. The LTCG tax rate was set at 20% with indexation benefits, while the short-term gains were taxed as per the tax slabs.
In 1997, then Finance Minister P Chidambaram introduced a 10% dividend distribution tax, while LTCG and STCG remained unchanged. Until then, the dividends were taxed in the hands of the shareholder. "I intend to reward companies who invest in future growth. Hence, I propose to levy a tax on distributed profits at the moderate rate of 10 per cent on the amount so distributed. This tax shall be incidence on the company and shall not be passed on the shareholder," he said.
In Union Budget 2003-04, then Finance Minister Jaswant Singh temporarily exempted all listed equities from the capital gains tax. "In order to give a further fillip to the capital markets, it is now proposed to exempt all listed equities that are acquired on or after March 1, 2003, and sold after the lapse of a year, or more, from the incidence of capital gains tax, " he said.
In Union Budget 2004-05, then Finance Minster P Chidambaram abolished the LTCG Tax and proposed securities transaction tax instead. " I propose to abolish the tax on long-term capital gains from securities transactions altogether. Instead, I propose to levy a small tax on transactions in securities on stock exchanges. The rate will be 0.15% of the value of security. Thus, a transaction involving securities valued at, say, ₹100,000 will now bear a small tax of ₹150. The tax will be levied on the buyer. In the case of short-term capital gains from securities, I propose to reduce the rate of tax to a flat rate of 10%."
After abolishing the LTCG tax in 2004, Chidambaram raised the STCG tax rate from 10% to 15% in 2008.
After 14 years, Finance Minister Arun Jaitley re-introduced LTCG Tax. He argued, "The total amount of exempted capital gains from listed shares and units is around ₹3,67,000 crores as per returns filed for A.Y.17-18. Major part of this gain has accrued to corporates and LLPs. This has also created a bias against manufacturing, leading to more business surpluses being invested in financial assets. The return on investment in equity is already quite attractive even without tax exemption. There is therefore a strong case for bringing long-term capital gains from listed equities in the tax net."
The government introduced a 10% LTCG tax on gains exceeding ₹1 lakh without indexation from listed equity shares and equity mutual funds. It further said gains up to 31 January 2018 would be grandfathered - which implied that gains up to this date would not be taxed. Other eligible long-term assets continued to enjoy indexation.
Finance Minister Nirmala Sitharaman removed the indexation benefit for most long-term capital gains, including gains from property and gold, while reducing the tax rate from 20% to 12.5%. She hiked the LTCG tax on listed equities and equity mutual funds from 10% to 12.5%, but increased the annual exemption limit from ₹1 lakh to ₹1.25 lakh. The STCG tax on these investments was increased from 15% to 20%. The Budget also hiked STT on futures and options transactions. It changed the taxation of share buybacks, making proceeds taxable as dividend income in shareholders’ hands and allowing the cost of acquisition to be treated as a capital loss. Ordinary dividend income continued to be taxed at the shareholder’s applicable income-tax rate.
| Budget | LTCG Rate | STCG Rate | Dividend Tax | STT |
|---|---|---|---|---|
| 1992-93 | 20% with indexation benefit | As per income tax slab rate | Taxable in the hands of shareholder | Not introduced |
| 1997-98 | 20% with indexation benefit | As per income tax slab rate | 10% dividend distribution tax on domestic companies introduced; shareholders exempt | Not introduced |
| 1999-2000 | 20% with indexation benefit or 10% without indexation |
As per income tax slab rate | 10% dividend distribution tax on domestic companies; shareholders exempt | Not introduced |
| 2001-02 | 20% with indexation benefit or 10% without indexation |
As per income tax slab rate | DDT abolished; dividends became taxable in the hands of the shareholder | Not introduced |
| 2003-04 | Qualifying listed equity acquired on or after 1 March 2003, and held for 1 year exempt from tax | As per income tax slab rate | 12.5% DDT introduced for companies; shareholders exempt | Not introduced |
| 2004-05 | ABOLISHED | 10% tax rate set for eligible transactions | 12.5% DDT continued for companies; shareholders exempt | 0.15% STT introduced in securities on stock exchanges |
| 2005-06 | Exemption continued | 10% tax rate continued | Status quo on dividend tax as well | Rates increased across categories to 0.02% |
| 2007-08 | Exemption continued | 10% tax rate continued | 15% DDT on companies; shareholders exempt | Status quo |
| 2008-09 | Exemption continued | Tax rate increased to 15% | 15% DDT on companies; shareholders exempt | No change |
| 2012-13 | Exemption continued | 15% tax rate continues | 15% DDT on companies; shareholders exempt | STT reduced to 0.1% on cash delivery transactions |
| 2013-14 | Exemption continued | 15% tax rate continues | 15% DDT on companies; shareholders exempt | STT on equity futures, mutual funds/ETFs reduced to 0.01%. |
| 2018-19 | REINTRODUCED 10% tax on gains exceeding ₹1 lakh, without indexation. Gains up to 31 Jan 2018 were grandfathered |
15% tax rate continues | 15% DDT on companies; shareholders exempt | Status quo |
| 2020-21 | 10% tax on gains exceeding ₹1 lakh, without indexation | 15% tax rate continues | DDT abolished; dividends became taxable in the hands of the shareholder as per applicable tax rates | Status quo |
| 2024-25 | 12.5% on equity gains exceeding ₹1.25 lakh. Rate for other LTCG set at 12.5% without indexation | Increased to 20% on specified assets including qualified equity | Dividends taxable in the hands of the shareholder as per applicable tax rates | STT on options increased to 0.1% STT on futures hiked to 0.2% |
Devansh Sharma is Deputy Editor at Mint (Digital), where he leads newsroom operations and helps shape the website's editorial strategy. With nearly 15 years of experience in business journalism, he specialises in business, personal finance, stock markets, mutual funds, and economic developments, while also covering geopolitics and major breaking news. During his tenure at Mint, which spans nearly two years, he has led planning and coverage of key news events, including the Union Budget, RBI monetary policy announcements, US Federal Reserve decisions, elections, and major international developments.<br><br> Devansh holds a Master's degree in Journalism & Mass Communication from the School of Communication Studies, Panjab University. Before rejoining Mint, he worked with leading business news organisations, including The Economic Times, Moneycontrol, and ET Money. At ET Money, he served as Senior Investor Educator, where he created educational content to help readers better understand investing, mutual funds, and personal finance. Throughout his career, he has focused on making complex business and financial developments accurate, accessible, and relevant for a broad audience.
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HomeMoneyPersonal FinanceIndia once had no LTCG tax: How income tax rules on LTCG, STCG and STT changed over the years
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