Share Market Tax: Foreign investors are constantly withdrawing their money from the Indian stock market. Amidst this situation, the central government has taken a big step regarding the tax rules of the market. According to people with knowledge of the matter, the government has sought views from investors, market people and tax experts on Long Term Capital Gains (LTCG) tax and Security Transaction Tax (STT). The purpose of this exercise is to understand the concerns of investors and get their suggestions.

The move follows Finance Minister Nirmala Sitharaman’s statement at an event in Delhi on October 13. The Finance Minister said on this issue that there is a lot of discussion on this issue. He clarified that we are very close to the budget and preparations have already started. So, it is not right now to say what will be considered and what will not. The Finance Minister also admitted that the issue came up before him during his interactions with investors from India and abroad. After his statement, there was a rise in the stock market.

Reduction of foreign investment from the market

The market value of the Indian stock market has fallen by a whopping $924 billion from its peak in September 2024. On one hand, artificial intelligence (AI)-related stocks overseas are witnessing a huge rally, while on the other hand, foreign portfolio investors (FPIs) are withdrawing huge amounts of money from the Indian equity market. For this reason, the demand for relaxation of these taxes has intensified to support the market and bring back foreign capital.

In June this year, the government exempted FPIs from withholding tax on interest earned from LTCG and government securities. After this decision, expectations of similar relief have increased for the equity market.

Investors are worried about double taxation

Market stakeholders have raised the issue of levying both LTCG and STT on a single transaction. They call it double taxation. As per the current rules, both domestic and foreign investors have to pay 12.5% ​​LTCG tax if they hold shares for more than 12 months. Including cess and surcharge it comes to around 15%. Apart from this, 0.1% STT is levied on both buyers and sellers of shares. In addition, the buyer will also have to pay 0.015% stamp duty.

In today’s volatile global environment, India has to compete with countries like the US, Britain, Singapore, Hong Kong, South Korea and Taiwan, says Sudhir Kapadia, senior consultant at KPMG. All of these countries do not charge foreign investors capital gains tax on securities traded there. India is an exception where both taxes are levied on the same transaction. Kapadia suggested that the STT be slightly increased by removing the capital gains tax on foreign investors. This will not affect government revenue and will also curb high-frequency trading.

Government exchequer will be affected

It will not be easy for the government to decide to give tax breaks. Before taking any step one has to consider the impact on the government exchequer. Fertilizer subsidy bills have increased due to conflict in West Asia. Apart from this, funds are also required for large social programs. At the same time, some opposition voices have also raised the issue that the removal of this tax would greatly reduce the share of the tax to be shared with the states.

If we look at the government figures, the total LTCG collection in the financial year 2025 (FY25) is Rs. 1.29 lakh crore was. Last year’s Rs. 72,249 crore this is almost double. At the same time, the STT collection in fiscal year 2026 (FY26) was Rs 57,522 crore. Between April 1 and October 14, STT collections increased by 52% to Rs. 46,840 crore has happened.

What are the expectations from Budget 2027?

Sameer Gupta, tax leader at EY India, says that foreign investors do not have to pay capital gains tax in any major market globally, while India has a double whammy. He said that after the decision of Tiger Global case, it is very important to give clarity on tax to foreign investors. Let us tell you that in January, the Supreme Court had ruled that the $1.6 billion profit that Tiger Global made by selling its stake in Flipkart to Walmart would be taxable in India. The court rejected the claim of exemption under the India-Mauritius Agreement (DTAA).

According to Prateek Jain, partner at Price Waterhouse & Company, Budget 2027 to be presented on February 1 is a good opportunity to reform tax rules amid high interest rates and currency fluctuations globally. Jain reminded that STT was introduced as an alternative to LTCG and not as an additional tax. He suggested that there should be a zero LTCG rate for long-term investments or an exemption to adjust STT to capital gains tax. This will encourage investors who want to invest money for long term.