LTCG At 12.5%, STT On Every Trade: Is India’s Equity Tax Burden Too High?

Dalal Street has found a fresh reason for optimism after Finance Minister Nirmala Sitharaman said the government was open to hearing stakeholders’ views on long-term capital gains (LTCG) tax and securities transaction tax (STT). Her remarks have revived expectations of a possible review of India’s equity taxation framework at a time when foreign portfolio investors (FPIs) have withdrawn more than ₹3 lakh crore from domestic equities in 2026.

However, a change in taxation is not yet confirmed. Speaking at the Bloomberg New Economy Forum 2026, Sitharaman said it was too early to comment on possible changes, with preparations for the next Union Budget already under way. She acknowledged that capital gains tax, transaction taxes and the treatment of different asset classes had been widely discussed by investors in India and overseas.

“The debate on tax in the market, debate on STT, and also the question of treating all asset classes similarly, has been a very well-discussed topic,” the finance minister said.

The debate has gained significance since the Union Budget 2024 raised LTCG tax on listed equities to 12.5% from 10% and short-term capital gains (STCG) tax to 20% from 15%. The government also increased STT on derivatives in Budget 2026.

With Indian equities facing foreign selling pressure, investors are now questioning whether lowering the tax burden could improve post-tax returns, make the market more competitive internationally and encourage overseas capital to return.

How Does India’s Equity Tax Regime Compare Globally?

India taxes long-term gains on listed equities at 12.5% on gains exceeding ₹1.25 lakh in a financial year, provided the securities have been held for more than 12 months. Short-term gains on qualifying listed equity transactions are taxed at 20%, while STT adds a transaction-level levy.

According to Puneet Singhania, Director at Master Capital Services, India’s LTCG tax rate sits in the middle of the international range rather than making the country an outlier.

“The real irritant is the stack: investors also pay STT on every trade, and short-term gains are taxed at 20%. Hong Kong and Singapore pull in capital precisely because they don’t tax gains,” Singhania said.

He cited the US, the UK, Japan and Germany as markets where capital gains taxation varies, while Hong Kong and Singapore do not tax capital gains. The comparison, however, also depends on the applicable rules, investor category and other taxes in each jurisdiction.

The concern for investors is the combined effect of taxes on transactions and realised gains. STT is charged on eligible transactions regardless of whether an investor ultimately makes a profit, while capital gains tax applies when taxable gains are realised.

Aditya Agarwala, CIO and Co-Founder of InvestValue Capital, said India’s combination of transaction tax and capital gains tax creates an additional cost for equity investors.

“Tax is not the main reason FPIs have pulled out more than ₹3 lakh crore this year. US 10-year yields above 5%, a weaker rupee and premium valuations are the bigger drivers. But when the global backdrop turns hostile, tax drag is what decides which markets stay on a global allocator’s shortlist,” Agarwala said.

Will A Tax Cut Bring Foreign Investors Back?

The scale of foreign selling has intensified the debate. FPIs withdrew a record ₹3.06 lakh crore from Indian equities in calendar 2026 up to October 13, according to NSDL data.

A more competitive tax framework could improve the relative attractiveness of Indian equities, particularly for global investors comparing after-tax returns across markets. But experts caution that taxation is only one part of the investment decision.

CA Kresha Gupta, Director and Fund Manager at Steptrade Capital, said higher capital gains taxes and STT have increased the cost of participating in Indian markets and become a consideration for investors assessing post-tax returns.

“In my view, a calibrated tax reset deserves serious consideration. A more competitive and predictable tax framework could help to improve post tax returns, encourage longer term capital allocation and support liquidity across the equity market,” Gupta said.

She added that this was particularly relevant for India’s SME and small-cap ecosystem, where sustained investor participation is important for capital formation and market depth.

Singhania, however, cautioned against expecting a tax cut to reverse foreign selling on its own. He said that when LTCG tax was raised in 2024, some foreign funds trimmed exposure, but valuations and global interest rates remained the bigger drivers of investment flows.

For FPIs, earnings growth, currency stability and valuations continue to matter. A tax reduction could strengthen India’s appeal at the margin, but it would not automatically offset unfavourable global financial conditions or high stock valuations.

Should The Govt Cut LTCG Tax Or STT First?

The two taxes affect investors differently, making the design of any potential reset important.

A reduction or removal of LTCG tax could improve post-tax returns for investors who realise long-term gains. It could also reduce the incentive to hold investments solely to avoid triggering a tax liability. However, the benefit would vary by investor. Singhania noted that investors whose annual gains fall within the ₹1.25 lakh exemption threshold may see little direct benefit from abolishing LTCG tax.

Agarwala argued that exempting LTCG on STT-paid listed equities would restore the original logic of STT, which was introduced in 2004 as a substitute for long-term capital gains tax. LTCG was subsequently reintroduced in 2018.

He said such a move could encourage longer-term investment and make Indian equities more attractive to global funds. However, he also acknowledged that the revenue cost would be significant, even if higher trading activity and stronger market participation recovered part of the loss over time.

STT, meanwhile, is charged on transactions rather than profits. Singhania argued that reducing it could lower trading costs and improve liquidity, although any reduction would also affect government revenue.

He favoured a phased approach, with an STT reduction considered first and a possible easing of LTCG tax later, depending on the government’s fiscal position. The government would have to weigh the potential benefits for investors against the revenue implications of either change.

What Would A Tax Reset Mean For Retail Investors?

For retail investors, the benefits would depend on the form of relief. Lower LTCG tax could increase returns after tax when investments are sold at a profit, while a lower STT could reduce transaction costs for eligible trades.

But the benefits would not be uniform. Long-term investors who regularly realise taxable gains could benefit more directly from an LTCG reduction, while frequent traders could be more sensitive to changes in STT. Investors whose gains remain below the applicable exemption threshold would see a smaller direct impact from an LTCG cut.

Gupta said a predictable and globally competitive tax framework could help improve investor confidence and support longer-term capital allocation. Singhania also cautioned that eliminating LTCG tax would disproportionately benefit wealthier investors with larger taxable gains, rather than all retail investors equally.

The government would also need to consider the fiscal cost. Singhania cited equity LTCG collections of ₹72,249 crore in assessment year 2024-25 and ₹1,29,158 crore in assessment year 2025-26, arguing that abolishing the tax would leave a substantial revenue gap. These figures and their underlying tax categories would need to be assessed against official revenue data before being used as definitive estimates of the cost of abolition.

For now, Sitharaman’s remarks have reopened the debate rather than signalled a policy decision. A carefully calibrated reduction in LTCG tax or STT could improve post-tax returns and investor sentiment, but a sustained revival in foreign flows would also depend on earnings prospects, valuations, currency stability and global interest rates.