Government says no proposal to scrap LTCG tax on equities

Government officials have denied any plans to repeal the long-term capital gains (LTCG) tax on equity investments, stating that there is no proposal under consideration to remove the levy. During a response in the Lok Sabha, Minister of State for Finance Pankaj Chaudhary clarified that the Centre continues to collect substantial revenues from the tax, which has seen a significant increase in recent years. According to official figures, LTCG tax collections rose by approximately 78%, reaching Rs 1,29,158 crore in the fiscal year 2025-26 compared to Rs 72,249 crore in the prior year. This growth underscores the tax’s role in contributing to public finances. The clarification follows ongoing pressure from investors and market participants who have called for the removal of the LTCG tax, citing concerns that it negatively impacts long-term investment behavior and lowers net returns. Some industry representatives have also pointed to disparities between domestic investors and foreign portfolio investors (FPIs), noting that FPIs benefit from tax exemptions on government securities, while domestic investors face the 12.5% tax rate on gains exceeding Rs 1.25 lakh per year. These arguments have gained traction as equity markets have reached new heights and retail participation in stock markets has increased significantly. Despite these pressures, the government has maintained its position that there is no immediate plan to abolish the LTCG tax. Officials emphasized that tax policy decisions, including adjustments to capital gains rates, are made during the annual budget process, taking into account broader economic factors. They reiterated that while periodic reviews are conducted, there is currently no indication that the levy will be scrapped. This stance aligns with previous responses from the Finance Ministry, which have consistently dismissed similar proposals in the past. The current LTCG tax structure applies to gains realized from the sale of listed shares or equity-oriented mutual funds held for more than one year. Under this framework, any profits exceeding Rs 1.25 lakh in a given financial year are subject to a 12.5% tax rate, whereas gains within this threshold remain untaxed. Short-term capital gains, defined as those arising from holdings of less than one year, are taxed at a higher rate of 20%. These rules have remained largely unchanged since their introduction in the July 2024 Union Budget. Investors had previously anticipated potential reforms, particularly as equity markets hit record levels and retail involvement expanded. Market analysts and individual investors alike had suggested that lowering the LTCG tax rate or raising the exemption threshold could stimulate further investment activity and enhance overall market confidence. However, these expectations were often met with reassurance from government officials, who consistently reaffirmed that no such measures were planned. The latest clarification from the Finance Ministry serves to reinforce the government’s existing position. While it acknowledges the need for regular review of tax policies, it makes clear that the LTCG tax on equity investments is not currently slated for abolition. As the financial landscape continues to evolve, the debate around the LTCG tax is likely to persist, with stakeholders continuing to advocate for changes that they believe would better support long-term investment strategies.