Scrapping LTCG tax: Relief for investors, but at what cost?

The idea of scrapping long-term capital gains (LTCG) tax on equities may sound like good news for investors. After all, who wouldn't want to keep more of the profits they make from stocks?

But some experts say removing the tax altogether may not be the best move for the economy, government finances or even investors.Finance Minister Nirmala Sitharaman recently said the government would be keen to hear views on removing LTCG tax during the upcoming Budget consultations. Speaking at the Bloomberg New Economy Forum in New Delhi on Tuesday, she acknowledged the debate around taxing equity investments, including the securities transaction tax (STT) and whether different asset classes should be taxed similarly.Her comments have brought the issue back into focus, particularly as foreign investors continue to pull money out of Indian markets.The government raised the LTCG tax on listed equities from 10% to 12.5% in July 2024, while increasing the annual exemption limit from Rs 1 lakh to Rs 1.25 lakh.

The short-term capital gains tax rate was also raised from 15% to 20%. In Budget 2026, the government increased STT on equity derivatives, with the revised rates taking effect from April 1, 2026.

However, the LTCG tax rate has remained unchanged.While a reduction or removal of the tax could offer some relief to investors, some experts believe a complete rollback may come at a considerable cost.WHY SCRAPPING LTCG TAX MAY NOT BE A GOOD IDEA One of the biggest concerns is the loss of revenue for the government. LTCG tax collections have grown significantly, and doing away with the levy would mean giving up an important source of income.Rajesh Singla, CEO and Fund Manager at Alpha AMC, pointed out that equity LTCG brought in around Rs 1.29 lakh crore in assessment year 2025-26, compared with Rs 72,249 crore a year earlier."Scrapping it would leave a sizeable gap," he said.Singla also argued that foreign investor outflows cannot be linked to taxation alone.

Global yields, rupee weakness and market valuations also influence investment decisions.Nishant Shanker, Chartered Accountant at Navraj Global Advisors, said removing LTCG tax could encourage investments, but it would also lead to a significant loss of government revenue."It could disproportionately benefit investors who already have substantial wealth invested in equities. The government needs to balance the objective of encouraging investment with the need for tax revenue and equitable taxation," he said.Puneet Singhania, Director at Master Capital Services Ltd, also cautioned that a tax cut may not necessarily lead to productive economic activity.He said investors could simply shift money from one investment to another instead of putting it into activities that support economic growth.

It could also encourage speculation and add to market volatility.WEALTHIER INVESTORS COULD GAIN MORE THAN SMALL INVESTORSAnother concern is that scrapping LTCG tax altogether may not benefit all investors equally.Investors with larger equity portfolios and bigger capital gains would save more in absolute terms. Small investors, on the other hand, may see limited benefits, particularly because the first Rs 1.25 lakh of eligible long-term equity gains in a financial year is already exempt from tax.Singla said the benefit would depend on the size of the gains."Larger HNI portfolios and institutions, including FPIs, would save the most.

So a full removal would tilt towards wealthier taxpayers, though supporters say it could also keep foreign capital invested longer," he said.Shanker also believes high-net-worth individuals would generally benefit the most because they have larger portfolios and potentially higher capital gains."Small retail investors would also benefit, but the amount of tax saved would typically be smaller. Therefore, scrapping LTCG tax altogether could disproportionately benefit wealthier taxpayers unless the government introduces safeguards or targeted incentives," he said.Singhania echoed this view, saying that the larger the taxable gain, the greater the tax saving.He pointed out that retail investors with profits within the existing Rs 1.25 lakh annual exemption would not receive any additional relief from scrapping the tax, as they already pay nothing on those gains.COULD TAX-FREE EQUITIES DISTORT INVESTMENT CHOICES?Removing LTCG tax could make equities more attractive compared with other asset classes such as property and gold, where capital gains continue to be taxed.While this may encourage more households to invest in stocks, experts warn that tax savings should not become the main reason for choosing an investment.Singla said scrapping the tax would improve post-tax returns from equities relative to property and gold.

However, this could push some households towards market risks they may not be prepared to take."Allocation should follow goals, risk appetite and time horizon, with tax as one input and not the deciding factor," he said.Singhania also cautioned that tax-free equities could encourage some families to put more of their savings into the stock market than they can afford to see fluctuate.Shanker said investment decisions are influenced by several factors, including risk, liquidity, returns and individual preferences. Removing LTCG tax could encourage households to allocate more money to equities, but it could also distort investment choices if tax considerations become more important than underlying economic fundamentals.There is also no guarantee that removing the tax would improve investment returns.

As Singhania pointed out, investors may get to keep more of their profits, but that does not make their stock picks safer or protect them from market losses.WHAT COULD THE GOVERNMENT DO INSTEAD?Experts believe there are other ways to encourage long-term equity investment without completely scrapping LTCG tax.One option is to raise the annual exemption limit so that small investors can enjoy greater relief. The government could also consider lower tax rates for investments held over longer periods.Singla said calibrated measures could strike a better balance between encouraging investment and protecting government revenues."These include a longer holding period with a lower or nil rate, a higher annual exemption limit, and a review of STT, which adds to transaction costs," he said.Shanker suggested targeted incentives, including a higher exemption threshold for small investors, tax benefits for investments held over longer periods and incentives for retirement-oriented equity schemes.Singhania also said simpler capital gains rules could make investing easier for first-time investors.

A reduction in STT could help lower transaction costs, although active traders would benefit more than long-term investors.Ultimately, scrapping LTCG tax may offer an immediate boost to market sentiment, but the longer-term impact needs closer examination. The government would have to weigh the benefits of encouraging equity investments against the revenue it could lose and the possibility of giving larger tax benefits to wealthier investors.- Ends