India eyes lower capital gains tax to revive markets

Ahead of Budget 2027-28, Indian government discussions are focusing on revitalizing the stock market by potentially lowering the long-term capital gains (LTCG) tax from 12.5%. This consideration addresses the prevailing sentiment dampener of flat market returns and stagnant wage growth impacting a broad spectrum of middle-class investors. The urgency stems from concerns over zero or negative returns in the stock market over the past two years, a period marked by significant retail investor participation.

Further proposals include permitting foreign investors to calculate their capital gains tax liability in dollar terms rather than the current rupee-based system. This move aims to mitigate the impact of currency fluctuations and align India's tax structure with global standards, as many international markets have lower or no capital gains tax. The government is exploring all options to stimulate market confidence and attract foreign portfolio investment (FPI).

Global investors perceive India's current 12.5% LTCG tax as high compared to other markets like China and Indonesia. The existing tax structure, requiring payments on rupee gains, exacerbates the issue for foreign investors. While Section 72 of the Income-tax Act offers some foreign currency conversion benefits, these are limited and exclude domestic investors and FPIs. Factors like the lack of an AI-driven market surge, perceived overvalued stocks, and rising global interest rates are also cited as hindrances to FPI inflows.