LTCG and STT Review as Foreign Investors Exit
The government has asked investors and tax experts about long-term capital gains tax and securities transaction tax as foreign portfolio investors pull money out of Indian equities.
The Centre has begun a review of long-term capital gains (LTCG) tax and securities transaction tax (STT), The Economic Times reported on 27 October. Foreign portfolio investors are pulling money out of Indian equities. Officials have asked investors, market bodies and tax experts for views, people familiar with the matter said. The exercise follows Finance Minister Nirmala Sitharaman's 13 October remark that 'there's a lot of debate', as Budget preparation begins.
What is the difference between LTCG tax and STT?
LTCG tax is charged on the profit from selling listed shares held for more than 12 months, at 12.5% or nearly 15% with cess and surcharge. STT is charged on the transaction itself, at 0.1% each on buyer and seller for equity investments, so it applies even when the investor makes no profit.
We are very close to the budget, and preparation has started. It may not be the best time for me to say what I will or will not consider.
Nirmala Sitharaman, Union Finance Minister, 13 October 2026 (as reported by The Economic Times)
What Happened?
The government has sought views on LTCG tax and STT from investors, market functionaries and tax experts. People familiar with the matter told The Economic Times that this starts a reassessment of capital market levies. It follows Finance Minister Nirmala Sitharaman's answer on 13 October that there is 'a lot of debate'. She added that Budget preparation has started.
Foreign portfolio investors have sold heavily in Indian equities this year. India's stock market has lost $924 billion in market capitalisation since its September 2024 peak, ET reported. In June, India scrapped long-term capital gains tax and withholding tax on interest earned on government securities held by FPIs.
Market participants say LTCG tax and STT are levied together on the same trade, which they call double taxation. LTCG tax is 12.5% on shares held for more than 12 months, or nearly 15% with cess and surcharge. STT is 0.1% each on buyer and seller, and stamp duty is 0.015% on the buyer.
LTCG collections were ₹1.29 lakh crore in FY25, almost double the ₹72,249 crore collected a year earlier. STT collections were ₹57,522 crore in FY26. Between 1 April and 14 October, they rose 52% to ₹46,840 crore, ET reported.
Tax experts quoted by ET say India competes with markets that do not tax non-residents on capital gains. KPMG's Sudhir Kapadia suggests scrapping capital gains tax on FPIs in return for a higher STT, which he says would be revenue neutral. Opposition voices argue that doing away with the levies would shrink the tax pool shared with states.
Why It Matters
Foreign portfolio flows are quick to enter and quick to leave, so they move share prices and the rupee. Tax is only one factor in that choice. ET notes that global trends, valuations and corporate earnings are key drivers. The Centre must also weigh lost revenue, with fertiliser subsidy bills rising because of the West Asia conflict.
No decision has been taken. The report relies on unnamed people, and the reports reviewed do not confirm whether the Budget will change either levy.
Concept Behind the News: FPI, LTCG and STT
Foreign portfolio investment means buying listed shares or bonds without seeking control. Foreign direct investment is lasting investment, often with management control, and is largely a non-debt-creating flow. Both are counted on the capital account of the balance of payments.
Capital gains arise when an asset such as shares, property or a painting rises in value and is sold. STT is charged on the transaction itself. Stock exchanges and futures markets are Union subjects, and taxes on transactions in them, other than stamp duties, fall in the Union List (Entry 90).
Union taxes affect states because a share of the divisible pool is passed on. The Fifteenth Finance Commission split it using six criteria: population, area, forest and ecology, income distance, demographic performance, and tax and fiscal effort.
Syllabus Connection
- GS-III (Economy): Capital markets, FPI and FDI, and the balance of payments
- GS-III (Economy): Taxation, Budget and fiscal policy
- GS-II (Federalism): Centre-State fiscal relations and the Finance Commission
- Prelims (Economy): Direct and indirect taxes, financial markets, external sector
PYQ Connection
UPSC Prelims 2007
Question: Participatory Notes (PNs) are associated with which one of the following?
- Consolidated Fund of India
- Foreign Institutional Investors
- United Nations Development Programme
- Kyoto Protocol
Answer: Foreign Institutional Investors
Option (b) is correct. Participatory Notes are issued to overseas investors who want exposure to the Indian market without registering directly. They are associated with Foreign Institutional Investors, now registered as FPIs.
UPSC Prelims 2019
Question: Which of the following is issued by registered foreign portfolio investors to overseas investors who want to be part of the Indian stock market without registering themselves directly?
- Certificate of Deposit
- Commercial Paper
- Promissory Note
- Participatory Note
Answer: Participatory Note
Option (d) is correct. A Participatory Note is issued by a registered foreign portfolio investor to an overseas investor who is not registered in India. The other instruments are money-market products.
UPSC Prelims 2011
Question: Both Foreign Direct Investment (FDI) and Foreign Institutional Investor (FII) are related to investment in a country. Which one of the following statements best represents an important difference between the two?
- FII helps bring better management skills and technology, while FDI only brings in capital
- FII helps in increasing capital availability in general, while FDI only targets specific sectors
- FDI flows only into the secondary market, while FII targets primary market
- FII is considered to be more stable than FDI
Answer: FII helps in increasing capital availability in general, while FDI only targets specific sectors
Option (b) is correct. FII (now FPI) adds to the general availability of capital through markets, while FDI usually targets specific sectors and ownership. Portfolio money is less stable than FDI, so option (d) is wrong, which is why outflows hurt markets so quickly.
UPSC Prelims 2020
Question: With reference to Foreign Direct Investment in India, which one of the following is considered its major characteristic?
- It is the investment through capital instruments essentially in a listed company.
- It is a largely non-debt creating capital flow.
- It is the investment which involves debt-servicing.
- It is the investment made by foreign institutional investors in the Government securities.
Answer: It is a largely non-debt creating capital flow.
Option (b) is correct. FDI is largely a non-debt-creating capital flow. Option (a) describes portfolio investment in listed companies, option (c) describes debt, and option (d) describes investment in government securities.
UPSC Prelims 2013
Question: Which of the following constitute Capital Account? 1. Foreign Loans 2. Foreign Direct Investment 3. Private Remittances 4. Portfolio Investment Select the correct answer using the codes given below.
- 1, 2 and 3
- 1, 2 and 4
- 2, 3 and 4
- 1, 3 and 4
Answer: 1, 2 and 4
Option (b) is correct. Foreign loans, FDI and portfolio investment are capital account items. Private remittances belong to the current account, so 1, 2 and 4 is correct.
UPSC Prelims 2012
Question: Under which of the following circumstances may ‘capital gains’ arise? 1. When there is an increase in the sales of a product 2. When there is a natural increase in the value of the property owned 3. When you purchase a painting and there is a growth in its value due to increase in its popularity Select the correct answer using the codes given below:
- 1 only
- 2 and 3 only
- 2 only
- 1, 2 and 3
Answer: 2 and 3 only
Option (b) is correct. Capital gains arise when a capital asset such as property or a painting rises in value. A rise in the sales of a product is business income, so only 2 and 3 are correct.
UPSC Prelims 2009
Question: Consider the following : 1. Fringe Benefit Tax 2. Interest Tax 3. Securities Transaction Tax Which of the above is/are Direct Tax/Taxes ?
- 1 only
- 1 and 3 only
- 2 and 3 only
- 1, 2 and 3
Answer: 1, 2 and 3
Option (d) is correct. As per the official key, Fringe Benefit Tax, Interest Tax and Securities Transaction Tax were all treated as direct taxes. Fringe Benefit Tax and Interest Tax have since been abolished; STT remains.
UPSC Prelims 2010
Question: Consider the following statements : In India, taxes on transactions in Stock Exchanges and Futures Markets are 1. Levied by the Union 2. Collected by the States Which of the statements given above is/are correct ?
- 1 only
- 2 only
- Both 1 and 2
- Neither 1 nor 2
Answer: 1 only
Option (a) is correct. Taxes on transactions in stock exchanges and futures markets are levied by the Union, which is why STT is a Union levy. States do not collect them.
UPSC Prelims 2004
Question: With reference to the Constitution of India, which one of the following pairs is not correctly matched?
- Forests : Concurrent List
- Stock Exchanges : Concurrent List
- Post Office Savings Bank : Union List
- Public Health : State List
Answer: Stock Exchanges : Concurrent List
Option (b) is correct. Stock exchanges and futures markets are in the Union List, not the Concurrent List. The other three pairs are correctly matched.
UPSC Prelims 2023
Question: Consider the following: 1. Demographic performance 2. Forest and ecology 3. Governance reforms 4. Stable government 5. Tax and fiscal efforts For the horizontal tax devolution, the Fifteenth Finance Commission used how many of the above as criteria other than population area and income distance?
- Only two
- Only three
- Only four
- All five
Answer: Only three
Option (b) is correct. Besides population, area and income distance, the Fifteenth Finance Commission used demographic performance, forest and ecology, and tax and fiscal effort. That is three criteria, so (b) is correct. Governance reforms and stable government were not criteria.
UPSC Prelims 2010
Question: A great deal of Foreign Direct Investment (FDI) to India comes from Mauritius than from many major and mature economies like UK and France. Why?
- India has preference for certain countries as regards receiving FDI
- India has double taxation avoidance agreement with Mauritius
- Most citizens of Mauritius have ethnic identity with India and so they feel secure to invest in India
- Impending dangers of global climatic change prompt Mauritius to make huge investments in India
Answer: India has double taxation avoidance agreement with Mauritius
Option (b) is correct. A large share of FDI came through Mauritius because India has a double taxation avoidance agreement with it. The same tax-treaty logic shapes how FPIs choose routes and how capital gains are taxed.
Visual Explanation: What an Equity Trade Costs
LTCG tax collections (₹ crore)
| FY24 | 72249 |
|---|---|
| FY25 (₹1.29 lakh crore) | 129000 |
Levies on an equity investment
| Levy | Rate | Who pays |
|---|---|---|
| LTCG tax | 12.5% (nearly 15% with cess and surcharge) | Domestic and foreign portfolio investors, on listed shares held over 12 months |
| STT | 0.1% each | Buyer and seller, on the transaction |
| Stamp duty | 0.015% | Buyer |
Connect the Dots
- Foreign portfolio investors pull large sums out of Indian equities this year.
- Indian markets lose $924 billion in value since the September 2024 peak.
- 13 October: Sitharaman says there is 'a lot of debate' on the levies.
- The Centre consults investors, market bodies and tax experts on LTCG tax and STT.
- Revenue, the fertiliser subsidy and the states' share are weighed against investor appeal.
- The upcoming Budget is the moment to revisit the levies, ET notes.
Read More
Read More
- Income Tax Department, Government of India (Official site: tax rules and notifications)
- India-Mauritius Tax Treaty Gets a Principal Purpose Test (Previous DORI article on treaty rules for investors)
Exam Takeaway
- The Centre is consulting on LTCG tax and STT; no change has been decided.
- LTCG is 12.5% on listed shares held over 12 months; STT is 0.1% on buyer and seller.
- FPI is portfolio money that can leave quickly; FDI is lasting and largely non-debt-creating.
- Stock exchanges and futures markets are Union List subjects; STT is a Union levy.
- Union taxes feed the divisible pool shared with states, so tax cuts raise federal questions.
Exam Angle
Prelims can test FPI versus FDI, participatory notes, the capital account and the Union List. Mains can ask whether lower capital market taxes attract stable foreign capital. Argue that tax is one factor, set it against revenue loss and the states' share, and note that valuations and global trends matter more.
Possible Question
Practice Question
Question: With reference to the taxation of equity investments in India, consider the following statements: 1. Taxes on transactions in stock exchanges and futures markets are levied by the Union. 2. Securities transaction tax is payable only when the investor makes a profit. 3. Long-term capital gains tax on listed shares applies to holdings of more than 12 months. Which of the statements given above is/are correct?
- 1 only
- 1 and 3 only
- 2 and 3 only
- 1, 2 and 3
Answer: 1 and 3 only
Statements 1 and 3 are correct. Transaction taxes on stock exchanges are a Union levy, and ET reports LTCG applies to shares held for more than 12 months. Statement 2 is wrong because STT is charged on the transaction itself, whether or not there is a gain.