LTCG, STT: Is it opportune time for FM Sitharaman to relook at taxation to contain FIIs selling in Indian stock market?
LTCG, STT | FII selling: Amid continuous FIIs' selling in the Indian stock market, the finance minister Nirmala Sitharaman dropped a hit to relook at the taxation rules for the Indian stock market. Replying to a question at the Bloomberg New Economy Forum 2026, Sitharaman said investors in India and abroad had been debating the taxation of capital gains and different asset classes, adding that the government was open to hearing their views. This has opened the debate, if there will be some relief for the Indian stock market investors coming in the Union Budget 2027?
In its latest Ecowrap report, SBI Research highlighted the need for structural measures by the government to strengthen capital inflows, stating that monetary and foreign exchange interventions by the Reserve Bank of India (RBI) alone may not be sufficient to address the challenges facing the rupee.
"The Government must seriously look into anchoring hot money flows into the equity segment by extending the holding period to say 2-3 years and abolishing the long-term capital gains tax for equity," the SBI Research report said.
Highlighting the need for removal of LTCG and STT, Seema Srivastava, Senior Research Analyst at SMC Global Securities, said, “Foreign Institutional Investors (FIIs) evaluate global emerging markets through the prism of net post-tax alpha, ease of operational execution, and macro stability.”
The SMC Global Securities expert said that tax predictability remains the primary lever for reversing FII outflows. The hike in capital gains taxes—short-term capital gains (STCG) to 20% and long-term capital gains (LTCG) to 12.5%—alongside applicable surcharges and the Securities Transaction Tax (STT), creates a friction drag that makes peer markets like South Korea or Taiwan relatively attractive.
Suggesting FM Sitharaman to move one step beyond the LTCG and STT, Seema Srivastava said, “To bring institutional capital back, India needs policy stability: grandfathering commitments to eliminate retrospective surprises, rationalizing high surcharge slabs on non-corporate funds, and extending tax concessions for debt and G-Sec investments under the Fully Accessible Route (FAR). Streamlining withholding tax clearances and double taxation avoidance agreement (DTAA) processes would immediately compress frictional trading costs.”
Decoding the current taxataion rules and its impact on the FIIs, Seema Srivastava said, “Beyond tax and compliance, market infrastructure and currency dynamics dictate fund flows. Active FIIs seek broader availability of rupee-hedging instruments, higher single-investor stock limits, and deeper corporate bond liquidity.”
Seema said that India’s macroeconomic fundamentals—resilient GDP growth, corporate earnings expansion, and strong domestic liquidity—provide an attractive structural anchor, foreign capital returns durably only when stable post-tax net yields match predictable regulatory boundaries. Treating foreign capital as an integrated partner through competitive, friction-free policies is the fastest catalyst to restore large-scale institutional inflows.
Speaking on the taxation rules in the Inian stock market, Avinash Gorakshkar, Founder at Avinash Mentor Research, said, “The LTCG is not a new tax, which is applied on the Indian stock market investors. It was existing during the Vajpayee government also, It was abolished in 2004, when the UPA-1 government came to powr and the then Finance Minister P Chidambaram announced to abolish the LTCG for Indian equity investors, This pumped both DIIs and FIIs, leading to sharp upside in the key benchmark indices and other indices of Dalal Street. However, in the Union Budget 2018, the LTCG was re-introduces, levying 10% tax on stocks with a holding period of 12 months or more.”
STT was also increased from 15% to 20% in the July 2024 Union Budget, which alomost broke the backbone of the intraday traders in the derivating segment, said Gorakshkar.
Gorakshkar said that both DIIs and FIIs digested the re-introduction of 10% LTCG tax, but things worsened when it was increased from 10% to 12.50%, and its threshold limit was also increased from ₹1 lakh to ₹1.25 lakh in July 2024 Union Budget.
Asit Manohar has nearly two decades of experience in the mainstream media. In this period, he has served esteemed media organisations like NDTV Profit, The Economic Times, and Zee Business. He has been working at LiveMint Digital since April 2021. During these two decades of journey in mainstream media, Asit has mainly covered external affairs, markets and personal finance. However, his earliest beats include railways, SME, MSME, and politics (Congress beat). Some of his features on political, economic, and foreign policy are documented in the parliamentary records. <br><br> While pursuing his MA (Mass Communication, Session 2004-06), Asit began his media career as a stringer at All India Radio in Varanasi. At AIR Varanasi, Asit worked with the Gyanvani, Yuvvani and Vividh Bharti teams. After working for nearly one year at AIR Varanasi, he shifted to print journalism and started working as a stringer for the HT Media Ltd, Varanasi. At HT Media Ltd in Varanasi, he covered the BHU beat. <br><br> Asit has also worked with some brokerage houses. He has worked with Religare Broking and India Infoline, where he assisted the research team in developing and executing trade strategies for intraday cash, F&O, and commodities. <br><br> Asit is a Gold Medalist in MA (Mass Communication) from BHU, Varanasi. He did his BSc. (Hons) in Mathematics from Magadh University, Bodh Gaya. Asit was a National Talent Scholarship holder during his senior secondary studies (1988-91).
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