Calls for LTCG Tax Review Grow as Investors Seek Relief Amid Market Weakness

Investors, Experts Urge Government to Tweak Long-Term Capital Gains (LTCG) Tax Structure

With Indian equity markets facing a sharp correction and foreign institutional investors (FIIs) withdrawing funds, the demand for a review of the Long-Term Capital Gains (LTCG) tax structure has intensified. Experts argue that the existing tax framework is making Indian markets less attractive, particularly for foreign investors, at a time when global capital flows are crucial for sustaining growth.

Key Concerns Over LTCG Tax

1. India Is One of the Few Markets That Tax Foreign Investors

   • India remains one of the only countries globally to tax foreign investors on capital gains.
   • Experts argue that this tax burden discourages global hedge funds, sovereign wealth funds, and pension funds from making long-term investments in India.

2. Rising Tax Rates Add to Investor Woes

   • In last year’s Union Budget, Finance Minister Nirmala Sitharaman increased LTCG tax from 10% to 12.5% and Short-Term Capital Gains (STCG) tax from 15% to 20%.
   • Many investors believe higher tax rates are hurting market liquidity and reducing India’s appeal as an investment destination.

3. Structural Issues in Taxation for Foreign Investors

   • Global hedge funds investing in India face a tax double-whammy, as capital gains taxes often cannot be offset against taxes paid in their home countries.
   • This results in double taxation, where investors end up paying tax both in India and in their own country.

4. STT Introduction and Broken Promises on LTCG Tax Removal

   • When Securities Transaction Tax (STT) was introduced in 2004, it was believed that LTCG and STCG taxes would be phased out.
   • However, the opposite happened, and investors now pay both STT and capital gains taxes.

What Experts Are Saying

• Devarsh Vakil, Head of Prime Research, HDFC Securities

  • “The government should scrap LTCG tax not just for foreign investors but for Indian investors as well.
  • If complete removal isn’t possible, they should elongate the holding period to 2-3 years and then scrap the tax altogether.”

• Samir Arora, Helios Capital

  • “The biggest mistake the government made was imposing capital gains tax on foreign investors.
  • It was a huge mistake, and they should accept it.”

• Divaspati Singh, Partner, Khaitan & Co

  • “India’s attractiveness as an investment destination is declining due to timid returns, regulatory complexities, and tax burdens.
  • Hedge funds face tax problems when investing in India, especially due to double taxation issues.”

• Rahul Charkha, Partner, Economic Laws Practice

  • “A mere tax reduction may not be enough—FIIs want regulatory stability, ease of doing business, and clarity on dividend taxation.”

• Shravan Shetty, Managing Director, Primus Partners

  • “India needs long-term growth capital, and a friendlier tax regime could attract pension and sovereign funds.
  • A cut in LTCG tax could help attract foreign inflows, especially when the rupee is depreciating and US interest rates have risen.”

Potential Solutions to Reform LTCG Tax

1. Increase the Holding Period for LTCG Exemption

   • Instead of taxing gains made after one year, extend the LTCG exemption to two or three years, encouraging long-term investments.

2. Lower or Remove LTCG Tax for Foreign Investors

   • Many Asian and Western markets do not impose capital gains tax on FIIs.
   • Removing or reducing LTCG tax could attract more foreign capital into Indian equity markets.

3. Provide a Tax Credit System for Foreign Investors

   • Allow foreign investors to offset Indian LTCG taxes against taxes paid in their home country, eliminating double taxation issues.

4. Phase Out Capital Gains Tax as STT Revenue Increases

   • Increase reliance on STT (Securities Transaction Tax) while gradually reducing LTCG tax.

Government’s Likely Stance

• The government is unlikely to remove LTCG tax completely, as it remains a key revenue source.
• However, policymakers may tweak the structure to ease tax burdens without losing revenue.
• Possible changes could include raising the holding period for tax-free LTCG or offering tax relief to long-term foreign investors.

Will the Government Act?

With India needing foreign capital to sustain economic growth, tax experts and investors are urging the government to reconsider its capital gains tax policy. While a full rollback seems unlikely, adjustments such as a longer holding period for tax exemptions or a reduction in FII tax rates could help boost investor confidence.

The upcoming budget and policy announcements will be closely watched to see if the government takes steps to address these concerns and make India a more attractive investment destination.