Growing Calls to Reassess LTCG Tax Ahead of Union Budget 2024-25

Finance Minister Nirmala Sitharaman has recently indicated her willingness to gather opinions regarding the long-term capital gains (LTCG) tax, as discussions intensify ahead of the Union Budget scheduled for February 2024. During her remarks at the Bloomberg New Economy Forum in New Delhi, she acknowledged the ongoing debate surrounding LTCG tax and its implications for investors, stating that the timing may not be ideal for her to disclose specific considerations for the upcoming budget.

The demand for the abolition of the LTCG tax has surged among market participants, particularly in light of significant foreign capital outflows. Experts have criticized the combination of the LTCG tax and the Securities Transaction Tax (STT) as detrimental to both domestic and international investors. According to SBI Research, foreign investors have pulled out ₹44,166 crore from Indian equities in October alone, contributing to total outflows exceeding ₹3 lakh crore this year, driven by factors such as high crude oil prices and a stronger US dollar.

In a recent Ecowrap report, SBI Research urged the government to reconsider its stance on the LTCG tax, suggesting that extending the holding period for equities to 2-3 years and eliminating the LTCG tax could help stabilize capital flows into the market. The revenue generated from the LTCG tax for the assessment year 2024-25 was reported at ₹72,249 crore, with projections for 2025-26 indicating a significant increase to ₹1,29,158 crore, as shared by Minister of State for Finance Pankaj Chaudhary in Parliament.

In the Union Budget for 2024-25, FM Sitharaman announced various tax adjustments, including an increase in the short-term capital gains tax (STCG) on certain financial assets from 15% to 20%. Additionally, the LTCG tax rate on listed equities and equity mutual funds rose from 10% to 12.5%, while the exemption limit was raised from ₹1 lakh to ₹1.25 lakh annually. The government also removed indexation benefits for long-term capital assets like real estate and gold, further complicating the tax landscape for investors.

Looking ahead, the debate over the LTCG tax is expected to continue as stakeholders await the Union Budget announcement. The government’s decisions regarding tax policies will play a crucial role in shaping investor sentiment and potentially influencing foreign investment trends in the coming months.