Capital Gains Tax Review: Government Seeks Views on LTCG Removal for Equities, Generates ₹1.29 Lakh Crore Revenue
How much it matters for each exam
1At a glance
The government is reviewing the Long-Term Capital Gains (LTCG) tax on equities, seeking stakeholder views on its potential removal to attract Foreign Portfolio Investors (FPIs) who have been net sellers. The tax, reintroduced in 2018, currently stands at 12.5% (plus cess/surcharge ~15%) and generated significant revenue of ₹1.29 lakh crore last year, making its abolition a major fiscal decision.
Tax Revenue vs. Investment
LTCG tax abolition is under review to attract foreign investors, but it risks a major revenue loss of ₹1.29 lakh crore earned last year.
FPI Exodus
Foreign Portfolio Investors have sold over ₹3 lakh crore worth of Indian shares in the last 12 months, prompting the policy rethink.
Historical Flip-Flop
LTCG on equities was abolished in 2004 by the UPA government and reintroduced in 2018 by the NDA government, alongside STT.
2Facts to remember
Tap a card to see the answer. Try to recall it first.
3Detailed analysis
Context / Background
The debate on LTCG tax is cyclical. It was abolished in 2004 by Finance Minister P. Chidambaram under the UPA, with Securities Transaction Tax (STT) introduced as a replacement. The NDA government reinstated LTCG in Budget 2018, imposing a 10% tax (now 12.5%) on gains exceeding ₹1 lakh from equity shares held for over 12 months, while retaining STT. This created a dual tax burden unique among major global markets.
Core Analysis & Implications
The push for removal stems from massive FPI outflows (over ₹3 lakh crore in a year) and concerns about India's tax competitiveness. However, the fiscal implications are significant—LTCG contributed ₹1.29 lakh crore to the exchequer. Experts like EY India note that no other major market taxes FPIs on capital gains. SBI Research suggests increasing the long-term holding period to 2-3 years instead of abolition, a middle path. The Bernstein report cautions that tax relief alone may not attract FPIs if Indian equity valuations (PE ratios) remain high compared to other emerging markets.
Future Outlook / Way Forward
The final decision rests on balancing revenue needs against market sentiment, especially with rising subsidy burdens. The upcoming Union Budget will be the key platform for any announcement. A complete removal seems fiscally challenging; a more likely outcome could be an increase in the holding period threshold or a reduction in the tax rate. The government must also provide clarity on Grandfathering provisions and Treaty Benefits to rebuild FPI trust, as highlighted by the Tiger Global case reference.
4Background GK
Textbook concepts you need to understand this news
- Capital Gains Tax
- A tax levied on the profit (gain) arising from the sale of a capital asset like stocks, bonds, or real estate. It is categorized as Short-Term Capital Gains (STCG) and Long-Term Capital Gains (LTCG) based on the holding period.
- Foreign Portfolio Investment (FPI)
- Investment by non-residents in Indian securities such as stocks, bonds, and mutual funds. FPIs are regulated by SEBI and are distinct from Foreign Direct Investment (FDI) which involves controlling stakes in companies.
- Securities Transaction Tax (STT)
- A direct tax levied on the purchase and sale of securities (equities, derivatives, mutual fund units) listed on recognized stock exchanges in India. It was introduced in 2004.
- Price-to-Earnings (P/E) Ratio
- A valuation ratio calculated by dividing a company's current share price by its earnings per share (EPS). A high P/E ratio may indicate that a stock is overvalued, or that investors expect high growth.
5How exams will ask this
- Data: LTCG tax revenue of ₹1.29 lakh crore (last year)
- Nodal Body: Ministry of Finance (Department of Revenue)
- Legal Point: LTCG applicable on equity held for more than 12 months
Don't make this mistake!
They may ask about the year LTCG was abolished (2004, UPA) vs. reintroduced (2018, NDA) and confuse it with STT introduction (2004). They might also swap the current LTCG rate of 12.5% with the old 10% rate or the effective rate including cess (~15%).
Write these in mains answers
Fiscal trade-offFPI sentimentDual taxation burden (STT+LTCG)Valuation metrics (P/E ratio)
6Practice questions
Pick an answer, then read the explanation.
- Q1Easy
Which ministry/department is responsible for the policy regarding Long-Term Capital Gains (LTCG) tax on equities?
Explanation: Taxation policies, including direct taxes like Capital Gains Tax, fall under the domain of the Ministry of Finance, specifically its Department of Revenue. SEBI regulates market participants, and RBI handles monetary policy.
- Q2Hard
Consider the following statements regarding the Long-Term Capital Gains (LTCG) tax in India:
- 1.The LTCG tax on equities was completely abolished in the Union Budget of 2004-05.
- 2.Currently, the LTCG tax rate is 10% on gains from equity shares held for more than 12 months.
- 3.The Securities Transaction Tax (STT) was introduced as a replacement when LTCG was abolished in 2004.
Which of the statements given above is/are correct?
Explanation: Statement 1 is correct: LTCG on equities was abolished by Finance Minister P. Chidambaram in 2004. Statement 2 is incorrect: The current LTCG rate is 12.5%, not 10%. Statement 3 is correct: STT was introduced in 2004 when LTCG was abolished. Hence, option C is correct.
- Q3Medium
According to the news article, how much revenue did the government earn from Long-Term Capital Gains (LTCG) tax in the previous year?
Explanation: The article explicitly states that the government earned nearly ₹1.29 lakh crore from LTCG tax on shares in the previous year. ₹3 lakh crore is the amount sold by FPIs, making it a close distractor.
- Q4Medium
What is a primary argument cited in the news for reviewing the Long-Term Capital Gains (LTCG) tax on equities?
Explanation: The article states that the review is driven by the need to bring back Foreign Portfolio Investors (FPIs), who have sold over ₹3 lakh crore worth of Indian shares in the past year. The other options, while related to economic policy, are not the primary reason discussed.
7All sources
Original27 October 2026 · Read story- Merged27 October 2026 · Read story
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