How are equity investments taxed in India? A guide to capital gains tax
In a bid to invigorate domestic and foreign mutual fund investments, India's Securities and Exchange Board has put forth recommendations for tax concessions. These proposals are designed to boost post-tax returns, particularly as market performance has been behind that of emerging counterparts. The current capital gains tax rates are seen as a hindrance, leading to demands for a review.
India's securities market regulator has recommended tax concessions for foreign investors and domestic mutual fund investors, reviving the debate over the country's taxation of equity investments as weakening market returns and sustained foreign outflows put pressure on investor sentiment.The Securities and Exchange Board of India (SEBI) has proposed changes aimed at improving post-tax returns for investors.
The recommendations come at a time when Indian equities have underperformed several emerging markets, prompting calls for a review of capital gains tax and other levies.Here is a look at India's existing equity tax structure, the case for rationalisation and how the country compares with other markets.How are equity investments taxed in India?Domestic and foreign investors are subject to the same capital gains tax rates on listed equities in India.Investors pay a long-term capital gains (LTCG) tax of 12.5% on profits from shares held for more than 12 months.
Gains from shares sold within 12 months attract a short-term capital gains (STCG) tax of 20%.Live EventsAdditional levies, including surcharges and cess for purposes such as health and education, push the effective tax rate to nearly 15% on long-term gains and close to 24% on short-term gains.Equity investors also pay Securities Transaction Tax (STT), which is calculated on the value of transactions.
The applicable rates differ between cash market trades and equity derivatives.Foreign investors face an additional tax obligation on dividend income. Dividends from listed Indian equities are subject to a withholding tax of 20%.Why are investors seeking lower taxes on equities?The demand for tax reforms comes amid a prolonged period of underperformance in Indian equities relative to other emerging markets.The Nifty 50 has declined 4.8% over the past two years and is down 11% so far in 2026, putting it on course for its weakest annual performance in 15 years.
The BSE Sensex has fallen 6.2% over the same two-year period.In contrast, MSCI's Emerging Markets index has gained around 40% over the last two years.Weak market performance, coupled with a depreciating rupee that reduces dollar-denominated returns, has weighed on foreign investor sentiment. Foreign investors have sold more than $50 billion worth of Indian shares since 2025.Market participants have argued that lowering the tax burden on equity investments could make Indian stocks more attractive by improving returns after taxes.What is the government's position on equity tax cuts?The government generally announces changes to the country's tax structure during the annual federal budget in February.
However, it can introduce tax changes at other times as well.In October, Finance Minister Nirmala Sitharaman said domestic and foreign investors had flagged concerns about the long-term capital gains tax and Securities Transaction Tax.She said she would be "keenly hearing" views on the matter ahead of the next budget, scheduled for early 2027.The government has not made any commitment to reduce taxes on equity investments.How has India's capital gains tax changed over the years?India's taxation of equity investments has undergone several changes over the past two decades.The government abolished long-term capital gains tax on listed equities in 2004 when it introduced the Securities Transaction Tax (STT).However, the LTCG tax was brought back in 2018 at a rate of 10%, while STT continued to remain in place.The tax burden increased further in 2024, when the government raised the LTCG tax rate to 12.5% and the short-term capital gains tax rate to 20%.These changes increased the overall tax liability for equity investors.How does India's taxation of foreign investors compare globally?India's approach to taxing foreign portfolio investors differs from that of several major financial markets, as it imposes capital gains tax on profits generated within the country.Many international markets either exempt foreign portfolio investors from capital gains tax or allow such gains to be taxed in the investor's home country.According to a note by brokerage firm IIFL earlier this year, countries and financial markets including the United States, the United Kingdom, Singapore, Hong Kong, the United Arab Emirates, Saudi Arabia and South Africa do not impose capital gains tax on foreign portfolio investors.
Brazil also offers exemptions in most cases.This difference in tax treatment has added to calls for India to reconsider its equity taxation framework and improve the competitiveness of its financial markets.Editorial note: The rewrite preserves the original figures and quoted wording. Before publication, verify the October finance minister remarks, the 2026 market-performance figures and the precise scope of the SEBI recommendations.
Also, the original copy repeats the byline and dateline; these have been removed from the body.(You can now subscribe to our Economic Times WhatsApp channel)
