Moves underway to curb selling by foreign investors; major changes possible in rules ranging from LTCG to STT..

FPI Outflow: The Indian stock market has been witnessing a sharp decline for some time now. The primary reason for this is the sustained withdrawal of funds by Foreign Portfolio Investors (FPIs). The central government has now shifted into 'action mode' to curb this sell-off. It is considering significant changes to the regulations concerning Long-Term Capital Gains (LTCG) tax and the Securities Transaction Tax (STT). Finance Minister Nirmala Sitharaman has also indicated that she will look into the concerns raised by investors regarding the LTCG tax. According to a report by The Economic Times, a government official stated that a final decision on this matter will be taken only after careful deliberation.

Suggestions from the Ministry of Finance meeting
To address this critical issue, officials from the Ministry of Finance have held discussions with prominent market experts. On October 28, The Economic Times reported that the Ministry had sought input from all relevant stakeholders. Those familiar with the discussions indicate that several distinct suggestions have been put forward. Some have proposed the complete abolition of the LTCG tax, while others have recommended a reduction in its rates. Another suggestion is to remove this tax exclusively for Foreign Portfolio Investors (FPIs). Regarding the STT, it has been suggested that the tax could be reduced for certain products while being increased for others.

From the RBI to SEBI: Support for changes
According to sources, both the Reserve Bank of India (RBI) and the market regulator, the Securities and Exchange Board of India (SEBI), support the removal of the LTCG tax to make India a more attractive destination for foreign investors. Most participants in the meeting also advocated for the abolition of the LTCG tax on equities. Furthermore, it was suggested that the government could consider a marginal increase in the STT specifically for options trading, without altering the tax structure for cash or futures transactions. They argue that options trading accounts for the largest share of daily market turnover. Regulators are also attempting to curb the excessive speculation taking place within this segment.

Impact on the exchequer and concerns among domestic investors
It will not be easy for the government to decide on a reduction in Long-Term Capital Gains (LTCG) tax or the Securities Transaction Tax (STT). In the 2025 fiscal year, the government garnered a substantial revenue of ₹1.29 lakh crore from LTCG, while STT contributed ₹57,522 crore. Before implementing any tax cuts, the government must assess the potential loss in revenue, as these funds are used to finance social sector schemes and subsidies. Meanwhile, some experts have cautioned against granting tax exemptions exclusively to foreign investors, noting that such a move would likely draw sharp criticism from domestic investors. Currently, a 20% tax applies to short-term capital gains (STCG) on listed shares held for up to one year, while a 12.5% ​​LTCG tax is levied on shares held for more than one year.

Foreign investors concerned over declining dollar-denominated returns
Foreign investors argue that many competing Asian markets do not impose an LTCG tax, which puts India at a disadvantage. Market experts point out that the combination of a depreciating rupee and capital gains taxes has significantly eroded the dollar-denominated returns for foreign investors, making markets in other countries appear more attractive. During the meeting, it was suggested that the taxable gains of foreign investors could be calculated in dollar terms rather than in rupees. Furthermore, some Foreign Portfolio Investor (FPI) representatives have requested a simplification of the processes involved in bringing capital into India and repatriating it. Officials have carefully considered all the suggestions; the government will now evaluate the implications of these various aspects before reaching a final decision.

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