As foreign institutional investors (FIIs) continue their massive selloff of Indian equities—offloading $15 billion this year—calls for a revision in India’s capital gains tax regime are growing louder.In an interview with CNBC-TV18, Sunil Badala, Head of Tax at KPMG India, argued that there is a case for reducing both long-term and short-term capital gains tax rates, while Akhilesh Ranjan, Advisor of Tax Policy at PwC India, believes that India’s current framework is already balanced.”There is a case for some reduction in the rate of tax,” said Badala, pointing to the recent increase in long-term capital gains tax from 10% to 12.5% and short-term capital gains tax from 15% to 20%. He noted that the sharp hike, coupled with additional levies such as education cess and surcharge, has made the tax burden “really steep.”
Before 2018, long-term capital gains (LTCG) were completely exempt from taxation in India, a move designed to attract long-term investments. The reintroduction of LTCG tax at 10% was seen as a policy shift, and now the upcoming increase to 12.5% in April 2026 has sparked concerns over India’s investment climate.Badala acknowledged that while capital gains tax alone may not be the primary reason for the FII exodus, reducing the rates could help make Indian markets more attractive. “On an immediate basis, we can go back to the rates applicable before last year’s budget—10% for long-term and 15% for short-term. There is also scope for further reduction, maybe even 50% of what it is today.”
In contrast, Ranjan dismissed the need for an overhaul of the capital gains structure, arguing that last year’s reforms had already simplified the tax regime. He emphasised that taxation of long-term capital gains is a policy choice, dependent on a country’s economic considerations.”There are strong arguments against taxing long-term capital gains, such as concerns about taxing inflation and discouraging asset switching. However, equally valid are the reasons for taxation—many gains are real and stem from market valuations, not just inflation,” Ranjan said.He further highlighted that a zero-tax regime on long-term capital gains could distort capital allocation, diverting funds from productive sectors. Addressing concerns that the 12.5% tax rate might be driving away foreign investors, he said, “I don’t think that’s really the case. There are several factors affecting the stock market apart from tax policy.”With the FII selloff wiping out over $1.3 trillion of investor wealth and Indian markets experiencing historic volatility, the debate over capital gains tax is heating up. Some investors and market participants, including veteran fund manager Sameer Arora, have even suggested scrapping capital gains tax entirely for foreign investors.However, Badala cautioned against a policy that exclusively benefits foreign investors. “Doing it only for foreign investors may not be appropriate, as it would discriminate against domestic investors. If we are to reduce capital gains tax, it should be done for all.”Watch accompanying video for entire discussion.
