Tax relief in the offing? Sebi moots scrapping 12.5% LTCG tax for FPIs: What it means and how investors stand to gain
The Securities and Exchange Board of India (Sebi) has reportedly recommended the removal of long-term capital gains (LTCG) tax for foreign portfolio investors (FPIs). According to a Reuters report, the move has brought the taxation of investment profits into focus, particularly the rules governing gains earned from selling shares and other financial assets.
LTCG tax is an important component of India's capital gains taxation framework. It applies to profits earned when investors sell assets after holding them for a specified period. The applicable tax rate and holding period depend on the nature of the investment.
Earlier, Sebi said that transaction costs associated with investing in equities in India were among the highest across jurisdictions.
Foreign investors have sold a record $31 billion in Indian stocks this year and overseas investments by retail investors have surged as returns have stagnated.
Long-term capital gains tax is levied on the profit earned from selling an asset after holding it for a specified minimum period. The profit generated from the sale is known as a capital gain, while the tax payable on that profit is called LTCG tax.
The tax applies to several asset classes, including listed shares, equity-oriented mutual funds, land, buildings and gold. However, the minimum holding period required to qualify for long-term capital gains treatment varies across asset categories.
For listed equity shares and equity-oriented mutual funds, investments generally need to be held for more than 12 months to qualify as long-term assets. In the case of immovable property, including land and buildings, the applicable holding period is more than 24 months.
Following changes introduced in the Union Budget 2024, long-term capital gains from eligible listed equity shares and equity-oriented mutual funds are taxed at 12.5%.
Investors are entitled to an annual exemption of ₹1.25 lakh on eligible gains from specified equity investments. Gains exceeding this threshold are taxed at 12.5%, subject to applicable conditions, including securities transaction tax (STT) requirements.
The revised rate replaced the earlier 10% LTCG tax rate and increased the exemption limit from ₹1 lakh to ₹1.25 lakh.
Consider an investor who purchases listed shares worth ₹2 lakh and sells them for ₹4 lakh after holding them for 18 months.
The capital gain would be ₹2 lakh, calculated by deducting the purchase value from the selling price.
The tax calculation would be:
- Purchase value: ₹2,00,000
- Selling value: ₹4,00,000
- Total capital gain: ₹2,00,000
- Annual exemption: ₹1,25,000
- Taxable capital gain: ₹75,000
- LTCG tax at 12.5%: ₹9,375
Therefore, the investor would pay ₹9,375 as LTCG tax, excluding applicable surcharge and cess.
The primary difference between long-term capital gains (LTCG) and short-term capital gains (STCG) is the duration for which an asset is held before being sold.
For eligible listed equity shares and equity-oriented mutual funds, investments held for 12 months or less generally attract STCG tax at 20%. If the holding period exceeds 12 months, the gains qualify for LTCG taxation at 12.5%, subject to the applicable exemption.
Thus, the holding period can significantly influence an investor's tax liability.
India's taxation of equity investment gains differs from the systems followed by several major emerging markets, including China, Indonesia, Brazil and Vietnam.
China: Individual investors are generally exempt from income tax on gains from selling shares listed on mainland stock exchanges. However, a stamp duty of 0.05% applies to share-sale transactions. Certain eligible foreign institutional investors also receive exemptions on specified mainland equity investment gains.
Indonesia: The country levies a tax of 0.1% on the gross value of share-sale transactions rather than on the actual profit earned.
Brazil: Capital gains from regular stock market transactions are generally taxed at 15%, while profits from day trading attract a 20% tax. The levy is calculated on net gains.
Vietnam: Individual investors generally pay a tax of 0.1% on the gross selling value of securities transactions, irrespective of whether the transaction generates a profit.
These differences highlight how emerging markets adopt different approaches to taxing investment returns, with some focusing on actual profits and others imposing levies on transaction values.
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