India's equity taxation regime could come under fresh scrutiny as the government considers feedback from investors and industry stakeholders. Tax experts Dinesh Kanabar, Chairman and CEO of Dhruva Advisors, and Sunil Badala, Partner and Head of Tax at KPMG India, have highlighted the need to review capital gains taxation, improve tax certainty and address the impact of rupee depreciation on foreign investors.
The debate comes at a time when India is competing with other emerging markets for foreign capital. Finance Minister Nirmala Sitharaman has said she is open to suggestions on the taxation of equities, including long-term capital gains tax and the securities transaction tax .
Equity tax structure under reviewKanabar said several representations have been made to the government on India's equity taxation framework, with a key concern being how the country compares with competing markets such as South Korea, Taiwan, Vietnam and Brazil.
India levies both capital gains tax and STT, while some competing markets offer exemptions on long-term capital gains. This has raised questions about whether the existing tax structure affects India's ability to attract foreign investment. Kanabar said the government needs to weigh the revenue implications of any tax changes against the potential benefits of improved investor sentiment and stronger fund inflows.
For the financial year ended March 2025, capital gains tax collections from equities, including listed and unlisted shares and mutual funds, stood at around ₹1.3 lakh crore, according to Kanabar. STT collections were approximately ₹53,000 crore in FY26.
Reducing or removing capital gains tax on equities could result in a significant revenue shortfall, which would be difficult to offset through a higher STT alone.“It can't be revenue neutral at all,” Kanabar said, pointing to the challenge of compensating for lost tax revenue through changes to transaction taxes.
He said, “If it was revenue neutral, it would be very easy - it would impact revenues, it would create a hole in the budget, and that's a question which the ministry needs to really look at.”He argued that the government needs to assess whether the potential improvement in investor confidence and capital inflows would justify the revenue loss.
Read Here | Kotak AMC’s Nilesh Shah urges government to review STT and capital gains tax burden on investors Foreign investors seek currency relief and tax certaintyBadala said foreign portfolio investors have also raised concerns about the impact of rupee depreciation on their investment returns.
An investment may show a gain in rupee terms but deliver a lower return, or even a loss, when converted back into dollars. He suggested that the government consider restoring a provision that would allow eligible foreign investors to calculate capital gains in foreign currency terms, taking exchange-rate movements into account.
Under the earlier framework, capital gains for foreign investors were calculated in dollar terms. That provision was subsequently removed as part of a simplification of tax rules. Badala said restoring the benefit could help address the impact of rupee depreciation on foreign investors, regardless of whether the government changes the broader capital gains tax regime.
He also highlighted the importance of consistency in tax policy, noting that overseas investors want greater certainty rather than frequent changes to the rules. Sovereign and pension funds also in focusKanabar said the government could also examine the tax treatment of sovereign wealth funds and pension funds investing in India.
Some of these investors may not pay tax in their home countries, making Indian capital gains tax an additional cost that reduces their returns. He said requests have been made to consider exemptions for such investors, alongside the demand for currency-related relief.
Any changes, however, would need to be assessed against the potential revenue loss and the broader objective of maintaining a competitive and predictable tax framework. The next steps will depend on how the government evaluates these representations.
While no specific tax changes have been announced, the ongoing debate has brought equity taxation, foreign investment and the need for policy stability back into focus ahead of the next Union Budget. Watch accompanying video for moreCatch all the stock market live updates here