Ficci seeks exemption from LTCG for listed shares
Industry body Ficci has urged the government to restore the exemption from long-term capital gains tax on listed securities, while suggesting that any revenue loss from such a move be offset by appropriately raising the tax rate applicable to such gains. The chamber, which represents a cross-section of Indian industry, has argued that the current tax architecture discourages long-term savings and investment in equities, and that a return to the earlier exemption regime would deepen retail participation in the capital markets. The demand comes amid the government's continuing efforts to mobilise resources and widen the tax base, making any concession on capital gains a politically and fiscally sensitive matter. Ficci's proposal essentially seeks a trade-off: exemption from LTCG for listed shares in return for a higher rate structure that protects the exchequer's revenue interests.
The background to this demand lies in the way India has taxed capital gains on listed securities over the years. For a long period, long-term capital gains on listed equity were fully exempt from tax, a regime that was widely credited with encouraging household savings to flow into the stock market. That exemption was withdrawn in the Union Budget of 2018-19, when the government reintroduced LTCG tax on listed equity and equity-oriented mutual funds at a prescribed rate, along with a threshold for gains. Since then, industry bodies and market participants have periodically argued that the tax acts as a deterrent to long-term investors, particularly at a time when household financial savings are increasingly shifting towards equities through mutual funds and systematic investment plans.
Ficci's submission is understood to have contended that the exemption structure should be revisited with an eye on both investment sentiment and revenue neutrality. The industry body has suggested that restoring the exemption while calibrating the rate appropriately could serve the twin objectives of encouraging long-term investment and safeguarding government revenues. It has also flagged concerns about the compliance burden and the impact of the tax on the holding behaviour of investors, arguing that taxation at the point of realisation can influence decisions on when to book gains. The chamber's view reflects a broader debate within industry circles on whether capital gains should be taxed at all at the long-term stage, or whether the focus should instead be on transaction-based levies such as the securities transaction tax.
Reactions to the proposal are likely to be mixed. Market participants and investor associations have in the past welcomed any move that reduces the tax burden on long-term equity holdings, arguing that it supports wealth creation and retirement savings. However, revenue authorities have historically been cautious about forgoing a stable source of tax collection, particularly given the need to fund public expenditure and infrastructure. The suggestion of raising the rate in exchange for the exemption may find some traction among policymakers who are focused on revenue neutrality, but it also raises questions about whether a higher rate would blunt the very investment incentive that the exemption is meant to create. The proposal is therefore likely to be examined carefully before any decision is taken.
The demand fits into a larger debate about how India taxes savings and investment as household portfolios diversify away from traditional instruments such as fixed deposits and gold. With retail participation in equities at record levels and mutual fund inflows through systematic plans remaining strong, the design of capital gains taxation has a direct bearing on how millions of small investors plan their finances. The government, for its part, has been balancing the need to encourage capital formation with the imperative of meeting fiscal targets. Industry bodies have consistently argued that a stable and predictable tax regime is essential for long-term investors, and any tinkering with the LTCG framework is watched closely by domestic as well as foreign portfolio investors.
Historically, India's approach to capital gains taxation has swung between exemption and taxation, reflecting changing fiscal priorities. The reintroduction of LTCG tax on listed equity in the 2018-19 Budget marked a significant departure from the earlier regime, and since then there have been repeated representations from industry for relief. Similar demands have been made in the run-up to successive Budgets, with chambers arguing that the tax dampens sentiment in the capital markets. The government has generally responded by leaving the core structure of the levy unchanged while making procedural adjustments from time to time, which suggests that a sweeping reversal of the existing regime will require considerable deliberation within the North Block.
What happens next will depend on the government's assessment of the fiscal room available and the broader thrust of its budget-making exercise. If Ficci's proposal gains support from other industry bodies and market participants, it could feature in the pre-Budget consultation process, where chambers traditionally present their wish lists to the finance ministry. A decision to restore the exemption would be a significant policy signal to long-term investors, while a decision to retain the status quo would reinforce the government's preference for revenue stability. For now, the proposal remains a representation from industry, and any outcome will be watched closely by investors, fund houses, and tax practitioners alike.
