India May Review LTCG Tax

Finance Minister Nirmala Sitharaman has indicated that she will consider the rising calls for tax changes to support equity markets, acknowledging the anxiety among retail investors and market participants amid net foreign investor outflows. The minister noted that circumstances have changed since the previous year, with overseas funds withdrawing a net $30.9 billion so far this calendar year.

The tax structure in question involves short-term capital gains from listed shares held for up to 12 months being taxed at 20%, while gains on shares held for more than 12 months are taxed as long-term capital gains at 12.5%. Foreign portfolio investors (FPI) have argued that India is among the few major markets that levy capital gains tax on foreign portfolio investors.

Sitharaman pointed out that the tax structure has not changed from 2023-24, when foreign inflows into Indian equities were the highest. However, she acknowledged that the situation is different now, with net foreign investor outflows being nearly $19 billion last year and $30.9 billion this year.

## Why it matters India needs capital to sustain growth of over 7 per cent, and the current outflows of foreign investment are a concern. The finance minister linked the issue to growth, saying that the country needs capital to keep its growth intact. She also recognised the need for equity markets to get support similar to what debt markets receive.

The finance minister's consideration of the tax changes is seen as a positive move by market participants, who have been arguing for a review of the long-term capital gains (LTCG) tax. However, Sitharaman stopped short of making immediate commitments to reduce taxes on capital gains, saying that she would consider all the concerns and voices.

## What happens next The upcoming Budget is expected to address the concerns of foreign investors and create a favourable environment for dollar investments. While the finance minister did not go into specifics on any possible changes, her acknowledgement of the anxiety among retail investors and market participants is seen as a step in the right direction. The government will need to balance the needs of foreign investors with the needs of domestic investors and the overall economy.