India’s Capital Gains Tax

March 4, 2025

India’s recent decision to impose a capital gains tax on foreign investors has stirred debate. Market experts, including Samir Arora, have termed it a major misstep by the government. The tax is seen as a deterrent for foreign institutional investors (FIIs), potentially leading to a decline in foreign investment in Indian markets.

About Capital Gains Tax

Capital gains tax is levied on profits from the sale of capital assets.
These assets can include stocks, mutual funds, property, and gold.
When these assets are sold, the profit made is classified as a capital gain.

Types of Capital Gains Tax

There are two primary types of capital gains tax:

Short-term capital gains (STCG): This applies when assets are sold within a short duration. It is generally taxed at a higher rate.
Long-term capital gains (LTCG): This applies when assets are held for an extended period. It is usually taxed at a lower rate to encourage long-term investments.

Short-term Capital Gains (STCG) in India

In India, STCG applies when assets like stocks and real estate are sold within specific holding periods. For equities, this is typically less than one year, and for real estate, less than two years. STCG on equity investments is taxed at 15%, while other assets are taxed according to the investor’s income tax slab.

Calculating STCG

STCG is calculated by subtracting the cost of acquisition and any related expenses from the selling price. The formula is – STCG = Sale Price – (Purchase Price + Improvement Costs + Transfer Expenses).

Long-term Capital Gains (LTCG) in India

LTCG on stocks and equity-oriented mutual funds is taxed at 12.5% for profits exceeding ₹1.25 lakh per year. The Union Budget 2024-25 increased the LTCG tax rate and eliminated the indexation benefit, which previously allowed inflation adjustments on the purchase price.

Calculating LTCG

LTCG is determined by subtracting the cost of acquisition from the sale price. For high-value assets, certain transaction costs can also be deducted.

Investor Concerns

The removal of indexation benefits has raised concerns among investors. It increases the tax burden, particularly for those selling property and unlisted assets. Foreign investors are notably affected, as they lack tax set-offs in their home countries.

Impact on the Indian Market

Since October 2024, foreign investors have withdrawn over ₹2 trillion from Indian equities. Factors contributing to this trend include higher capital gains tax rates, weak corporate earnings, a depreciating rupee, and stronger US markets offering better returns.

Comparative Taxation

India’s capital gains tax structure differs from other countries. For instance, Australia taxes 50% of capital gains, while the United States employs a progressive tax system. In contrast, countries like the United Arab Emirates impose no capital gains tax.

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