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Why LTCG Tax Cut is in Focus
The LTCG tax on equities, reintroduced in 2018 at 10% with an exemption of ₹1 lakh, was raised to 12.5% in 2024 with a ₹1.25 lakh exemption. This, alongside higher short-term capital gains (STCG), has increased costs for investors, prompting calls for relief in the upcoming budget.
Market experts, including Khushi Mistry of Bonanza, note that reducing capital gains taxes historically improved retail participation, such as during the 2004 LTCG exemption period. However, analysts caution that a tax cut alone may not reverse the ongoing FPI selloff without a broader recovery in corporate earnings.
Key Drivers for FPI Return
According to Dr VK Vijayakumar, Chief Investment Strategist at Geojit Investments, two main factors could encourage FPIs to resume buying: an improvement in corporate earnings and clarity on the India-US trade deal. While earnings recovery is expected in Q4 FY26, the trade deal timeline remains uncertain, creating ongoing market volatility.
Harshal Dasani from INVasset PMS added, “Even a modest LTCG tax cut may improve post-tax returns marginally, but large offshore funds focus on long-term growth durability, liquidity depth, and macro stability.” This indicates that policy tweaks may trigger short-term sentiment gains, but macroeconomic fundamentals remain the key driver for sustained inflows.
Market Impact and Outlook
The continued FPI outflows have contributed to a 2.5% decline in Nifty in the week ending January 23, eroding ₹16 lakh crore in market capitalization. Analysts suggest that while a LTCG tax reduction could offer some relief, stronger corporate earnings and stable policy frameworks are essential to restore investor confidence.
Investors are advised to keep track of upcoming announcements in Budget 2026, including potential changes to securities transaction tax (STT), which could further influence foreign and domestic participation in the market.
