Will LTCG Tax on Shares Be Removed — and Can That Alone Make the Stock Market Bounce Back?
Will LTCG Tax on Shares Be Removed — and Can That Alone Make the Stock Market Bounce Back?
The finance minister said she wants to hear views on LTCG tax, SBI Research proposed scrapping it, and the Sensex had its best day in months. But the 12.5% tax is still law, and the market faces bigger forces than one levy.
Under review, with no proposal announced. The earliest realistic change is the Budget, usually on 1 February.
Nifty rose 2.78% last week but is still about 12% below its January record.
You may have seen the headline on your phone: “LTCG tax to be scrapped?” It arrived just as the market was having its best week since April. If you hold shares or equity funds, the question is concrete. Should you hold off selling until March, in case gains become tax-free? Should you buy now, before a tax-cut rally? Or is this another rumour that fades by the Budget?
The honest answer is that nothing has changed yet, and the market’s recovery depends on far more than this tax. But the possibility is now being discussed openly by the finance minister herself, with officials confirming a review. This guide separates what was actually said from what was hoped, shows the money involved for the government and for you, and lays out what has to happen for the market to recover in a way that lasts.
Quick Summary
LTCG tax has not been removed, and no change has been proposed. On 13 October, Finance Minister Nirmala Sitharaman said many investors had raised LTCG and transaction tax with her and that she wanted to hear views. A government official said proposals were being examined. Three months earlier, the government told Parliament there was no proposal to abolish the tax. Any change would most likely come in the Budget for 2027-28. The Sensex gained 3.11% last week, helped by these remarks and a record IT rally, but heavy foreign selling, high oil prices and US rates still weigh on the market.
What We Know
- On 13 October, at the Bloomberg New Economy Forum in New Delhi, Sitharaman said investors in India and abroad had raised LTCG and STT with her, and that she was keen to hear views.
- A senior official told Moneycontrol the Centre has received proposals to review LTCG tax on equities and is examining them.
- SBI Research’s Ecowrap of 12 October proposed scrapping LTCG tax on equities and extending the holding period to 2 to 3 years.
- On 20 July, the government told the Lok Sabha there was no proposal to abolish the levy.
- The current rate is 12.5% on gains above ₹1.25 lakh a year, after more than 12 months of holding.
What Is Still Unclear
- Whether the review leads to full removal, a rate cut, a longer holding period, or nothing.
- Whether any change would apply to all investors, or only to holdings above a longer period.
- From what date a change would apply, and whether gains already made would be covered.
- Whether STT would rise to make up lost revenue.
What the Finance Minister Actually Said, and What She Did Not
The remarks that moved the market were brief. Speaking at the Bloomberg New Economy Forum, Sitharaman said LTCG was “something on which a lot of people are commenting,” both investors in India and those who meet her abroad. She added that in India it is “also a question of transaction tax that we have in the securities market,” mentioned the debate over treating asset classes alike, and said she would be keen to hear views. Kotak Neo reported that she called the discussion “healthy.”
She did not say the tax would go. She did not name a rate, a date or a holding period. Budget preparations are underway, and finance ministers routinely invite views at this stage. What makes this different is the context: a public signal from the minister herself, an official confirming that proposals are being examined, and a detailed proposal from the research arm of India’s largest bank, all in the same week.
Why July’s “no proposal” answer still matters
On 20 July, Minister of State for Finance Pankaj Chaudhary told the Lok Sabha there was no proposal under consideration to abolish the levy for retail and domestic investors, adding that capital gains rates are reviewed during the annual Budget. That is not a contradiction. A Parliament reply describes the position on that day; Budget policy is decided in the months before February. But it does show the government had not been planning this before the October outflows intensified.
Why LTCG Is Suddenly on the Table: ₹3 Lakh Crore Has Left
The trigger is foreign selling. Foreign portfolio investors have pulled ₹3.04 lakh crore from Indian equities in 2026 so far, according to the NSDL-based figures cited in SBI Research’s report and reported by Outlook Money, compared with ₹1.66 lakh crore in the whole of 2025. Exchange data compiled by HDFC Sky, which measures flows differently, puts foreign institutional selling at ₹4.50 lakh crore this year.
SBI Research’s argument is that removing LTCG tax, while lengthening the holding period, would reward patient money and reduce the sudden withdrawals that pressure the rupee. The rupee traded near ₹97 to the dollar early last week before recovering to about ₹94.96. The report also listed reasons for the outflows that have nothing to do with tax: high crude prices, a stronger dollar, rising US bond yields, and AI-linked opportunities in North Asian markets that India lacks.
The chart shows something the headlines often miss. Domestic institutions, mainly mutual funds fed by monthly SIPs, have bought more than foreigners sold. In October alone, domestic buying of ₹51,829 crore slightly exceeded foreign selling of ₹49,935 crore, according to HDFC Sky’s compilation. That is why the market has fallen about 12% from its peak rather than collapsing.
How LTCG on Shares Works Today, in Four Numbers
Long-term capital gains tax applies when you sell listed shares, equity mutual funds or eligible equity ETFs held for more than 12 months. Under rules carried into the Income-tax Act, 2025, which came into force on 1 April 2026, the first ₹1.25 lakh of such gains each financial year is tax-free. Gains above that are taxed at 12.5%, plus 4% cess and any surcharge. Indexation does not apply. Sell within 12 months and the gain is short-term, taxed at 20%.
The exemption covers your total long-term gains across all shares and funds for the year, not each sale. STT, the small securities transaction tax charged on every trade, is separate. It is not deducted when computing gains, and changing LTCG would not automatically change STT.
Fourteen years without the tax, then a return
Equity LTCG was exempt from 2004, when STT was introduced partly as a substitute, until the 2018 Budget brought back a 10% tax on gains above ₹1 lakh, with gains up to 31 January 2018 grandfathered. The market did not welcome it: on 2 February 2018, the day after that Budget, the Sensex fell about 840 points, Business Standard reported. When the July 2024 Budget raised the rate to 12.5%, markets fell sharply during the day but ended roughly flat.
- 2004STT introduced; long-term gains on listed shares made exempt
- 1 Feb 201810% LTCG returns above ₹1 lakh, gains to 31 Jan 2018 grandfathered
- 23 Jul 2024Rate raised to 12.5%, exemption to ₹1.25 lakh, STCG to 20%
- 1 Apr 2026Income-tax Act, 2025 comes into force
- 20 Jul 2026Lok Sabha told there is no proposal to abolish the levy
- 12 Oct 2026SBI Research proposes scrapping LTCG, with 2 to 3 year holding
- 13 Oct 2026FM invites views; Sensex jumps 1,109 points, 1.54%
- 1 Feb 2027Usual date for the Budget, where any change would be announced
The ₹1.29 Lakh Crore Problem: What Scrapping Would Cost
The strongest argument against removal is revenue. According to finance ministry data given to Parliament, LTCG tax on equity transactions brought in ₹1,29,158 crore in assessment year 2025-26, up nearly 78% from ₹72,249 crore a year earlier. That jump reflects the strong markets of 2024-25, and the higher 12.5% rate applying for part of that year.
Giving up more than ₹1 lakh crore a year is a large ask while the government is also managing higher oil import costs, with Brent near $105 a barrel and wholesale inflation at 11.39% in September. This is why, in our assessment, a partial change looks more plausible than full abolition. It is also why the minister’s mention of transaction tax drew attention: STT is collected on every trade, falls mostly on frequent traders rather than long-term holders, and could in principle offset some lost revenue. Nobody official has suggested that trade-off.
Four ways the review could end
| Option | What changes | Revenue impact | Likely market reaction | Plausibility |
|---|---|---|---|---|
| No change | 12.5% above ₹1.25 lakh stays | None | Some of the October gains could fade | Moderate |
| Higher exemption | Limit raised above ₹1.25 lakh | Small | Mild; mostly helps small investors | Moderate |
| Longer holding, lower rate | 2 to 3 year holding for 0% or lower rate | Medium, phased | Positive for long-term flows | Most discussed |
| Rate back to 10% | Reverses part of the 2024 increase | About 20% of revenue | Positive, short-lived | Moderate |
| Full removal | 0% after 12 months | Over ₹1.29 lakh crore a year | Strong rally, then focus on fiscal cost | Low |
The plausibility column is a desk assessment, not a forecast. It reflects the revenue at stake, the July Parliament reply, and the fact that the only detailed public proposal, from SBI Research, pairs removal with a longer holding period.
Your Money: How Much Tax You Would Actually Save
For most retail investors, the saving is smaller than the headlines suggest, because the first ₹1.25 lakh of gains is already tax-free. The benefit grows with the size of your gains. The table shows the tax on a year’s long-term equity gains under today’s rules, under a 10% rate with the same exemption, and under full removal.
| Long-term gains in a year | Taxable portion | Tax today, 12.5% plus cess | At 10% plus cess | If removed |
|---|---|---|---|---|
| ₹1.25 lakh | ₹0 | ₹0 | ₹0 | ₹0 |
| ₹2 lakh | ₹75,000 | ₹9,750 | ₹7,800 | ₹0 |
| ₹5 lakh | ₹3.75 lakh | ₹48,750 | ₹39,000 | ₹0 |
| ₹10 lakh | ₹8.75 lakh | ₹1,13,750 | ₹91,000 | ₹0 |
| ₹25 lakh | ₹23.75 lakh | ₹3,08,750 | ₹2,47,000 | ₹0 |
An investor with ₹2 lakh of gains would save under ₹10,000 even from full removal. That is real money, but it is not a reason to change a long-term plan. The investors with the most at stake are those sitting on very large gains, and foreign funds, which also pay 12.5%.
The Rally Has Two Engines, and Tax Is Only One
The day of the remarks, 13 October, the Sensex closed up 1,109 points, or 1.54%, at 73,034, and the Nifty rose 1.6% to 22,722, Upstox reported. It was the Sensex’s biggest one-day gain since late March. But the Nifty IT index rose 5.22% that same day after strong HCLTech results, and IT went on to gain 11.72% over the week, its best week since April 2008, according to HDFC Sky. Tech Mahindra alone rose 18.7%.
Upstox also reported that investors rotated into Indian IT after a slide in Asian chipmakers. So the rally was partly a tax-hope rally and partly an earnings and sector story. That distinction matters, because a rally built on earnings tends to last longer than one built on a policy hope that could disappoint in February.
Breadth is the warning sign. When a rally is led by one sector while midcaps and smallcaps gain under 1%, it is narrower than the headline index suggests. A broad recovery would show smaller companies joining in.
Will the Market Bounce Back? Five Tests Beyond the Tax
Even a full LTCG removal would not, on its own, fix the forces that drove the market down. The Nifty closed the week at 23,146, still 12.2% below its intraday record of 26,373.20 on 5 January, according to Goodreturns. The Sensex at 74,729 is about 13% below its December 2025 peak of 86,159. Getting back to the Nifty record would need a further rise of about 13.9%.
Test 1: Do foreign sellers stop selling?
Foreign funds were net sellers on most October days, then net buyers of ₹1,166 crore on Friday, 16 October. One day is not a trend. A sustained return of foreign buying would be the clearest sign that the recovery is real.
Test 2: What does the Fed do on 27 and 28 October?
US inflation came in at 3.7% in September, and the odds of a Fed rate hike at that meeting rose from 22% to 44%, CME FedWatch data showed. Higher US rates make US bonds more attractive than Indian shares for global funds, so a hike would work against any tax relief.
Test 3: Do oil and the rupee settle?
Brent near $105 a barrel and wholesale inflation of 11.39% squeeze company margins and the government’s finances. The rupee’s 2% gain last week, its best since March, helped. The RBI has also tightened forex derivative rules and raised minimum daily CRR maintenance to 99% from 90%.
Test 4: Can the market absorb the Jio IPO?
Jio Platforms’ ₹30,213 crore issue opens on 21 October and closes on 23 October, with a price band of ₹1,065 to ₹1,119. An issue that size can pull money from the secondary market for a few days. A strong subscription would also show that domestic demand remains deep.
Test 5: Do earnings carry the rally beyond IT?
Second-quarter results are arriving. IT’s results have impressed. Banks, consumer companies and industrials must follow for the recovery to broaden. The IMF’s 7% growth forecast for India in FY27 and FY28 is a supportive backdrop.
- DoneRemark13 Oct: FM invites views on LTCG and STT
- DoneReviewOfficial: proposals being examined
- NextBudget proposalUsually 1 Feb 2027, in the Finance Bill
- ThenFinance ActPassed by Parliament, typically by March
- FromIn effectUsually 1 Apr 2027, unless stated otherwise
What Investors Should Do While the Debate Plays Out
The practical answer is to keep making decisions on today’s rules. If you sell before 31 March, the current tax applies. Harvesting up to ₹1.25 lakh of gains each year, by selling and rebuying, remains useful whatever happens, because it raises your cost price for future tax. If you were planning a large sale for a goal, a few months’ delay in the hope of a cut is a bet on policy, and the market may move more than the tax you would save.
If you are investing new money, the tax debate is not a strong reason to rush in. Last week’s rally was narrow, and the Fed meeting and the Jio IPO come within days. Continuing SIPs, or investing a lump sum in stages over a few months, reduces the risk of buying at a short-term peak while still positioning you for a recovery.
- Use the ₹1.25 lakh exemption before 31 March
- Check the 12-month holding date before selling
- Do not postpone a needed sale for a possible cut
- Keep SIPs running through the volatility
- Stage lump sums over 3 to 6 months
- Watch the Fed decision on 28 October
- Watch FPI flows for 2 to 3 weeks, not 1 day
- Read the Budget on 1 February before acting
Frequently Asked Questions
Has LTCG tax on shares been removed?
No. LTCG tax on listed equity is still 12.5% on gains above ₹1.25 lakh a year. On 13 October 2026 the finance minister said she wanted to hear views, and an official said proposals are being examined, but no change has been proposed or passed.
When could LTCG tax be removed?
Any change would most likely be announced in the Union Budget for 2027-28, usually presented on 1 February. Changes in the Finance Bill normally take effect from 1 April, unless the Budget specifies another date.
What did Nirmala Sitharaman say about LTCG?
At the Bloomberg New Economy Forum on 13 October, she said many investors in India and abroad comment on LTCG, that securities transaction tax is also part of the question, and that she was keen to hear views. She made no commitment to change the tax.
What is the current LTCG tax rate on shares and mutual funds?
12.5% on long-term gains above ₹1.25 lakh in a financial year, plus 4% cess and any surcharge, for listed shares and equity mutual funds held for more than 12 months. Short-term gains are taxed at 20%.
How much does the government earn from LTCG tax on equities?
Finance ministry data given to Parliament show ₹1,29,158 crore from LTCG on equity transactions in AY 2025-26, up from ₹72,249 crore in AY 2024-25.
Why did SBI Research suggest scrapping LTCG tax?
Its 12 October report argued that removing the tax, while extending the holding period to 2 to 3 years, would encourage long-term investment and reduce sudden foreign withdrawals. FPIs have pulled ₹3.04 lakh crore from Indian equities in 2026 so far.
Will the stock market recover if LTCG is scrapped?
It could give a short-term boost, as the 13 October rally showed. A lasting recovery also depends on foreign flows, US interest rates, oil prices, the rupee and earnings. The Nifty is still about 12% below its January record.
Should I delay selling shares until the Budget?
Not if you need the money or the sale fits your plan. No change is guaranteed, and a market fall could cost more than the tax saved. This is general information, not personal tax advice.
The Short Version
LTCG tax on shares has not been removed. The finance minister said on 13 October that she wants to hear views, officials are examining proposals, and SBI Research has suggested scrapping it with a 2 to 3 year holding period. Any change would come in the Budget, usually on 1 February. Full removal would cost more than ₹1.29 lakh crore a year, so a partial change looks more likely. The market rallied 3% last week, helped by these remarks and a record IT surge, but the Nifty is still 12% below its peak. A lasting recovery needs foreign buying, steadier oil and a calmer Fed.
