A major change in rules from LTCG to STT could happen as foreign investors prepare to stop selling

FPI Outflow:The Indian stock market has been witnessing a steep decline for some time now. The biggest reason for this is the continuous withdrawal of money by Foreign Portfolio Investors (FPIs). Now the central government has come into action mode to stop this sale. The government is considering major changes in the long-term capital gains (LTCG) tax along with the Securities Transaction Tax (STT) rules. Finance Minister Nirmala Sitharaman has also made it clear that she will address investors’ concerns regarding LTCG. According to a report by the Economic Times, a government official said that the final decision on the matter will be taken after very careful consideration.

What suggestions came in the Finance Ministry meeting?

Finance Ministry officials have held a meeting with major market experts to find a solution to this critical issue. The Economic Times had reported on October 28 that the ministry had sought views from all parties on the issue. People involved in the debate say that the government has received many different suggestions. Some say that LTCG tax should be abolished completely while others have suggested reducing its rates. It is also suggested that this tax should be waived only for Foreign Investors (FPIs). At the same time, regarding STT, it has been suggested that it should be reduced on some products while it should be increased on others.

RBI to SEBI in favor of change

According to sources, from Reserve Bank of India (RBI) to market regulator SEBI (SEBI) are in support of the fact that LTCG tax should be removed to make India attractive to foreign investors. Most of the people present in the meeting also advocated abolition of LTCG on shares. However, he also suggested that the government could modestly increase the STT on options trading only without disrupting cash or futures transactions. His argument is that options trading accounts for the largest share of day trading. Regulators are also trying to curb excessive betting.

Impact on government exchequer, concern of domestic investors

It will not be easy for the government to decide whether to cut LTCG or STT. In FY 2025, the government received a whopping Rs 1.29 lakh crore from LTCG, while Rs 57,522 crore was earned from STT. Before making any cut in taxes, the government has to calculate its revenue loss, as this money is used to finance social sector schemes and subsidies. On the other hand, some experts have warned against giving tax breaks only to foreign investors. He says that if this happens, local investors will strongly criticize it. Currently, short term capital gains (STCG) tax is levied at the rate of 20 per cent on listed shares held for one year. LTCG tax of 12.5 percent is payable when shares are held for more than one year.

Foreign investors are worried about diminishing returns in dollars

Foreign investors argue that the LTCG tax is not levied in many other competing markets in Asia, thereby hurting India. Market experts said the double impact of capital gains tax along with a depreciating rupee has significantly reduced returns for foreign investors in dollar terms. For this reason, they are finding the markets of other countries more attractive. The meeting also came up with a suggestion that taxable profits of foreign investors should be calculated in dollars instead of rupees. Apart from this, some representatives of FPIs have also demanded to simplify the process from bringing money to India and taking it back. Officials have listened to everyone’s suggestions very carefully. Now the government will take the final decision only after checking the impact of all these aspects.