Budget 2027-28 | Complete exemption of LTCG tax not justified: Akhilesh Ranjan

The long-term capital gains (LTCG) tax could be a key focus ahead of Union Budget 2027-28. Could the government revisit capital gains taxation, and what will a reset mean for foreign institutional investors (FIIs) and retail investors?

The Federal spoke with Akhilesh Ranjan, Former Member, CBDT, to we examine the possible changes to LTCG taxation, their implications for investors and markets, and the tax policy questions that could shape next year's Union Budget.

Edited excerpts

Do you think India’s capital gains tax regime will see a rethink? Who stands to gain or lose from a potential reset?

I don't think the evidence for that is very strong. If you look at what's happening in the stock market, there could be a number of other reasons for the current situation. I think that is probably what the finance minister is saying when she calls for a discussion and an analysis of the actual causes behind what is happening in the stock and equity markets.

The most important question is whether a tax cut or an exemption will improve the situation and bring investors back. I think there are many more issues affecting the capital markets at the moment than capital gains tax alone.

Let's remember that long-term capital gains tax was reintroduced in 2018. Nothing seemed to be wrong with the markets at that time. It is only in the last six months that we have seen considerable disturbance.

I don't think this disturbance can be attributed to the increase in the tax rate from 10% to 12.5%. Overall, I don't see enough evidence to suggest that exempting long-term capital gains from tax will bring foreign portfolio investors flooding back into the market.

Several market experts are arguing not just for a tax cut but for the complete abolition of LTCG tax, potentially for the next 20 years. How do you view these suggestions?

With due respect to the experts, I think they are looking at the issue from a very narrow perspective. Tax policy must be geared towards a country's overall needs and circumstances.

When we look at India, its tax system, income profiles and the distribution of income and wealth, capital gains tax makes a lot of sense. We know that the proportion of high-income earners and high-wealth owners is very small in the Indian economy.

The government needs revenue, and that revenue has to come from a relatively small section of the taxpaying population.

We cannot simply ignore corporate profits. We have already brought corporate tax rates down to a very reasonable level of 25%. If we then exempt long-term capital gains, there will also be demands to exempt dividends. Where, then, will the government get its revenue?

Another factor I would like to point out is that this is the age of artificial intelligence (AI).

What is AI doing to the economy? It is reducing labour income. We are already seeing a decrease in labour income, and the latest income tax collection figures indicate that personal income tax collections are not growing at the same pace as corporate income tax collections. It is clear that this trend has begun.

Personal income tax, particularly tax on labour income, is declining in relative terms, while corporate profits and capital incomes are increasing correspondingly. If India completely exempts any part of capital income from taxation while also losing labour-related tax revenue because of the introduction of AI, which nobody can stop, it would be a very risky proposition for policymakers.

I don't see why an exemption for 20 years, five years or even two years is warranted in the current economic circumstances.

There may be issues that can be fine-tuned, but a complete exemption is not justified. I think the government collected around ₹1.3 lakh crore in taxes on long-term capital gains last year. It certainly cannot afford to give up that revenue.

You have pointed out that the government collected around ₹1.3 lakh crore from long-term capital gains tax. If a complete exemption is not the answer, what changes could be made to revive foreign investor interest?

One thing that can and should certainly be done is to address the multiple taxes imposed on market transactions. I have been saying this for a long time.

We have long-term capital gains tax, short-term capital gains tax and securities transaction tax. I agree that there is no real need to go overboard with all these taxes. I have long argued that the original rationale for introducing the securities transaction tax in 2004, when it was brought in as a substitute for long-term capital gains tax, has changed completely.

Once we reintroduced capital gains tax and started collecting substantial revenue from it, there seemed to be no justification for continuing with STT. One of the reasons for introducing STT was to establish an audit trail and obtain information about people investing in the stock markets. I think that purpose has now been fulfilled.

Stock exchanges submit the necessary returns, and that reporting can continue. The flow of information can be maintained without retaining STT. However, STT was increased in the last Budget. I think this creates a double whammy for investors. There is no legitimate ground for retaining STT when the government has decided to keep long-term capital gains tax at 12.5%.

So, in your view, there is a case for removing STT while retaining LTCG tax?

Yes, I would think so. It would not only reduce the hassles for investors but also make a difference to the margins of foreign portfolio investors. Many of them trade extensively in futures and options, and a substantial amount of their money goes towards STT. That is the kind of fine-tuning that could help.

Of course, the government would forgo around ₹60,000 crore to ₹70,000 crore in revenue. However, it would also be removing distortions from the tax system. I would recommend this approach on that account as well.

Another proposal reportedly being considered by the FM is dollar-based taxation for foreign investors. Some reports suggest that a change could even be announced before the Budget. How do you assess this proposal?

Yes, this proposal is being discussed, although it remains to be seen how soon any change might happen.

First, we should remember that we previously had a system under which foreign currency investments were converted into Indian rupees, or vice versa, and gains were calculated in a single currency. That arrangement existed alongside inflation indexation for domestic and resident investors.

The system for capital gains taxation has since changed, and resident and domestic institutions or investors no longer have inflation indexation.

If we now introduce a system that removes currency exchange risk for non-resident investors, it could amount to discrimination against domestic investors. That is the first concern.

Second, I don't know how much of a difference such a change would actually make. That needs to be examined.

We know that the Reserve Bank of India (RBI) and the government are making considerable efforts to keep the rupee under control and below the 100-per-dollar level. Several measures have been taken recently, and more will continue to be taken.

The strength of the Indian economy should also mean that the rupee does not experience a massive fall in the near future.

Will removing exchange-rate risk for foreign investors really help? I am not sure. That is something economists and others need to examine based on the facts.

While there is considerable discussion about foreign portfolio investors, what should be done to provide tax relief to domestic retail investors?

As I said, STT affects everyone, not just foreign portfolio investors. It affects every investor, including a small day trader who conducts transactions worth ₹1 crore in a day to earn a profit of ₹5,000. That trader is also subject to STT.

Removing or reducing STT would therefore have an impact on small investors as well.

On the capital gains front, we know that long-term gains up to a certain amount are still exempt from tax. I think the limit is ₹1.5 lakh or ₹1.75 lakh.

We also have several rollover exemptions. One can safely say that a considerable amount of activity in the real estate market is driven by gains people make in the stock market, which can then be rolled over into these exemptions when they purchase residential property.

There are already several measures in place for domestic investors when it comes to taxation on capital market transactions. There are many other areas in which tax relief could also be considered.

Will tax cuts revive sentiment in the Indian stock markets? You have worked closely with both the tax system and international investors. What are their main concerns, and what are the top three things they want from India in terms of relief?

The primary focus here is on foreign investors and large investors who come to India.

I think the first thing they want is certainty in the economic environment, particularly in taxation. They do not want frequent changes. They want stable policies and a predictable tax regime.

They also want to be confident that the Indian economy, which is growing at a good pace, will continue to grow in terms of other parameters, such as per capita income, so that the market remains robust.

Finally, they need assurance about the currency exchange situation. These are the issues foreign investors would primarily be looking at.

Several experts point out that other countries do not tax long-term capital gains earned by foreign investors or non-residents. Should India follow the same approach?

As I said, tax policy must be geared towards a country's own needs. Just because Europe or the UK does not impose such a tax does not mean India should also stop taxing long-term capital gains.

We have to examine our own policy imperatives and act accordingly.

Foreign investors need certainty. They need to be assured that the political and economic environments will remain stable.

The world is going through a difficult economic phase, but there are enough indicators in the Indian economy to suggest that conditions are capable of improving.

I don't think we should panic or make hurried decisions. Instead, we should ensure that the systemic reforms already under way continue.

As a former policymaker, what advice would you give the government when the debate becomes so intense that demands for an LTCG tax cut dominate the discussion?

I think a good approach would be to publish a paper and invite public discussion, allowing people to respond quickly. We would then see all kinds of reactions and responses. At present, certain voices may be more dominant than others, but the government should not resort to knee-jerk reactions or respond compulsively.

There should be a proper discussion. The government should publish an issue paper outlining the pros and cons of making changes to capital gains taxation, invite comments and then take a reasoned decision. That would at least assure people that the government is examining every aspect of the issue.

There should be no knee-jerk reaction. If the discussion establishes that a change is necessary, the government can consider it. For example, it could reduce the tax rate from 12.5%, if there is a demonstrated need.

You are not necessarily recommending a reduction, but if the government concludes that one is needed, what should the new LTCG tax rate be?

I am not saying that the rate should be reduced. If a reduction is considered necessary, what rate would you suggest instead of 12.5%? Would abolishing the tax solve the problem?

I think there was considerable interest in understanding why the rate was increased to 12.5% in the first place. The 10% rate that we had for a long time was a very reasonable rate. I think it should be restored. The rate could be brought down by 2.5 percentage points.

So, if a change is made, your suggestion is to return to the earlier 10% rate and remove STT?

Yes, the earlier 10% rate was a well-tested arrangement. My suggestion is that the government should consider restoring it rather than moving towards complete exemption.