Government Reviews Equity LTCG and STT Framework Ahead of Budget 2027

Key Takeaways

• The government has sought views from investors, market participants and tax experts as it reassesses long-term capital gains tax and securities transaction tax on equity investments. 
• Under the existing framework, eligible long-term gains from listed equities and equity-oriented mutual funds exceeding ₹1.25 lakh in a financial year are taxed at 12.5%, apart from applicable surcharge and cess. 
• No reduction, abolition or restructuring of the LTCG tax has been announced, meaning the prevailing tax rules continue to apply unless the government formally changes them. 

The government has begun reviewing the taxation of equity-market investments, bringing long-term capital gains tax and securities transaction tax back into focus ahead of the Union Budget 2027. 

The review remains at the consultation stage. Investors, market intermediaries and tax specialists have been asked for their views on the existing capital-market levies, according to reports on 27 October. Finance Minister Nirmala Sitharaman had earlier indicated that the government was open to hearing suggestions on LTCG and STT during the Budget consultation process. 

For mutual fund investors, the discussion is particularly relevant to equity-oriented schemes. 

Under the prevailing rules, units of an equity-oriented mutual fund held for more than 12 months qualify as long-term capital assets. Eligible long-term capital gains exceeding ₹1.25 lakh in a financial year are taxed at 12.5%, with applicable surcharge and cess charged separately. The ₹1.25 lakh threshold applies to aggregate gains covered under the relevant equity capital-gains provision. 

These rules have not changed. 

Recent reports have indicated that the government is considering the wider structure of equity taxation and how India's framework compares with other financial markets. Moneycontrol reported on 26 October that discussions have involved the government, SEBI, the Central Board of Direct Taxes, banks and other stakeholders. 

Another issue reportedly under examination is the taxation of foreign investors. One proposal being discussed is whether gains earned by foreign investors should be measured in dollar terms rather than only in rupees, which could account for the effect of currency depreciation on actual overseas-investor returns. No such change has been formally adopted. 

The debate also extends beyond LTCG. The Economic Times reported that stakeholders have raised concerns about capital gains tax and STT applying simultaneously to equity-market transactions. The report said LTCG collections reached ₹1.29 lakh crore in FY25, compared with ₹72,249 crore in the preceding year, while STT collections stood at ₹57,522 crore in FY26. 

For equity mutual funds, however, the immediate position remains unchanged. Redemptions that meet the required holding period continue to be taxed under the prevailing equity capital-gains framework. 

Any change in the tax rate, exemption threshold, qualifying holding period or treatment of different investors would require a formal government decision. Until then, discussions around lower rates or abolition of LTCG remain proposals rather than policy.