LTCG, STT debate: FM Sitharaman to 'tread cautiously' on taxation ahead of Budget

Union Finance Minister Nirmala Sitharaman said on Tuesday that she would want to "tread cautiously" on taxation as the Union Budget approaches. Speaking at the 8th Bloomberg New Economy Forum in New Delhi, she said long-term capital gains (LTCG) tax was an issue on which many people had been commenting.

Acknowledging the ongoing debate over long-term capital gains tax (LTCG) and the securities transaction tax (STT) in equity markets, Sitharaman said some market participants argue that the two taxes overlap and that only one should remain.

The debate comes amid sustained foreign investor selling, with foreign portfolio investors (FPIs) withdrawing Rs 3,07,719 crore in 2026 so far, following outflows of Rs 1,66,286 crore in 2025. Foreign equity flows were nearly flat in 2024, with net inflows of just Rs 425 crore. Persistent selling has weighed on market sentiment, with the Nifty and Sensex delivering five-year absolute returns of 23 per cent and 18 per cent, respectively.

Explaining the government’s approach to asset-class taxation, Sitharaman said the aim of aligning tax treatment was to bring different asset classes at par, rather than simply increase the tax burden. She said the issue had generated considerable debate and that she remained keen to hear investors’ views.

In its latest Ecowrap report, SBI Research called for abolishing long-term capital gains (LTCG) tax on equities and extending the holding period to two to three years from the current one year to help anchor short-term money flows into the equity market. The report's recommendations come amid persistent foreign institutional investor (FII) outflows and weakness in the equity market.

SBI Research said cumulative FPI outflows from the equity segment stood at Rs 3.51 lakh crore between 2021 and September 2026, with 2023 being the only exception to the otherwise subdued trend. It noted that the heavy outflows in 2025 and 2026 reflected a marked disconnect between foreign investors and the factors that typically support portfolio investment.

The SBI Research report said that while the Reserve Bank of India (RBI) had been taking steps to navigate an increasingly challenging global environment, the government also needed to urgently address long-pending structural issues affecting capital inflows.

Rupee weakness driven largely by external challenges
Addressing concerns about the rupee’s depreciation and its impact on foreign investment flows, Sitharaman said the RBI was taking measures to manage volatility. She said India would prefer the rupee to find its own level rather than seek to fix its value.

Sitharaman also said external challenges were adding to the pressure on the Indian rupee. She reiterated that fiscal discipline should not worry investors, as the government had been prudent in its approach. However, she acknowledged that the rupee's volatility and its movements against the US dollar remained a challenge that the government would address.

FM reiterated that the government has remained very prudent in its fiscal discipline and should not bother investors. She is positive on India's fundamentals and sees outside challenges dampening the sentiments. "I am sure there are efforts, which the RBI would take further to make sure that rupee does not become to volatile."

India seeks capital for AI, semiconductors and green energy
Earlier in the discussion, Sitharaman said global capital was increasingly moving towards the United States and artificial intelligence, with hyperscalers attracting substantial investment from across the world. She said India wanted to attract investment not only into frontier AI but also into applications that help businesses improve productivity.

She highlighted India’s efforts to attract capital into semiconductor manufacturing, chip design, testing and packaging, as well as renewable energy, power transmission, green hydrogen, green ammonia and electric vehicles.

On semiconductors, Sitharaman rejected criticism that India’s ambitions were unrealistic. She said India was pursuing a pragmatic strategy that included manufacturing chips used in everyday applications, such as cars, refrigerators and Internet of Things devices, alongside efforts to develop more advanced chips.

India’s investment pitch, she said, rests on its domestic market, digitalisation, regulatory reforms and ability to manufacture for both domestic consumption and exports.