Abolish LTCG Tax Or Lose Foreign Capital: SEBI, RBI Signal High-Stakes Trade-Off To Ministry Of Finance

Capital market regulator SEBI and the Reserve Bank of India (RBI) have mounted coordinated pressure on the Ministry of Finance to scrap the Long-Term Capital Gains (LTCG) tax on equity investments. The regulators have presented a stark macroeconomic trade-off between securing ₹4.5 lakh crore in tax collections and arresting a record ₹3.04 lakh crore foreign capital flight from Indian stock exchanges.

The joint regulatory push frames LTCG abolition not merely as investor relief, but as an urgent necessity to safeguard systemic stability and domestic market liquidity ahead of the upcoming Union Budget.

RBI Flags Macro Strain Over Revenue Gains

The Reserve Bank of India has introduced a rigorous macroeconomic cost-benefit argument to the pre-Budget debate, urging North Block to evaluate the hidden price of capital gains taxation. Financial regulatory assessments indicate that the overall economic damage from relentless foreign portfolio outflows—which reached ₹3.04 lakh crore in 2026 secondary market trading—far exceeds the direct revenue collected through the levy.

The central bank's analysis outlines three critical systemic risks stemming from high transaction tax friction:

• Exchange Rate Volatility: Unrelenting FPI liquidations place heavy downward pressure on the Indian Rupee, forcing repetitive foreign exchange interventions to stabilize the currency.

• Banking System Funding Stress: As retail capital increasingly moves toward equity markets to absorb foreign selling, commercial banks face a widening deposit deficit that raises borrowing costs across the real economy.

• Competitive Disadvantage: India remains an international outlier by taxing mobile foreign portfolio capital, actively driving institutional capital toward zero-LTCG Asian financial hubs like Singapore, Hong Kong, and South Korea.

Regulators And Brokers Target Transaction Friction

Alongside the central bank, Securities and Exchange Board of India (SEBI) has submitted official pre-Budget proposals advocating the total removal of the 12.5% LTCG tax for foreign portfolio investors. The capital markets regulator has also urged the Ministry of Finance to permit tax-free switching between domestic mutual fund schemes, eliminating artificial tax barriers for retail investors.

Concurrently, stockbroking associations and research bodies, including SBI Research, have called for a complete repeal of equity LTCG. Market participants argue that layering LTCG on top of Securities Transaction Tax (STT), Short-Term Capital Gains (STCG), GST, and stamp duty renders Indian exchanges excessively expensive for global institutional fund managers.

Cost-Benefit: Revenue Mop-Up Vs Market Outflows

The policy dilemma leaves the Ministry of Finance balancing an explicit financial trade-off:

• The Revenue Benefit: The Income Tax Department has collected over ₹4.5 lakh crore in direct LTCG tax revenues since former Finance Minister Arun Jaitley reintroduced the tax in 2018. Annual tax mop-up surpassed ₹1.29 lakh crore in the 2025–26 assessment year alone.

• The Economic Cost: Cumulative FPI secondary market equity sales hit ₹3.04 lakh crore in 2026, effectively wiping out foreign net equity additions accumulated over the past decade and destabilising broader cross-border capital flows.

Government Initiates Pre-Budget Consultations

Addressing escalating industry concerns, Union Finance Minister Nirmala Sitharaman confirmed that the government remains open to evaluating feedback from market participants and financial regulators regarding capital gains and transaction tax structures during ongoing pre-Budget consultations.

"We are willing to listen to investors and market participants on capital gains tax and transaction friction," Sitharaman stated during recent pre-Budget interactions, acknowledging that high tax friction has featured prominently in regulatory representations.

While the Ministry of Finance must balance the immediate fiscal loss against foreign exchange stability and long-term capital retention, market participants expect a definitive policy decision on LTCG rationalisation when the Finance Bill is introduced in Parliament.