The government may decide on changes to equity capital gains tax in the weeks before the Union Budget, according to media reports, including a review of the 12.5% long-term rate applicable to domestic and foreign investors and calculating foreign investors’ gains in dollars rather than rupees.

A lower rate would reduce the tax on a given profit, while dollar-based computation would change the profit on which foreign investors are taxed. If the government wants the outcome to influence FPI allocations for 2027, it should complete the review early enough for investors to assess those implications before committing capital.

Critics argue that fund managers are blaming taxes for disappointing returns when foreign investors have other reasons to sell. They also point out that the government cannot surrender revenue without considering who bears the cost. These objections challenge the promise that tax relief will bring overseas money back, but they do not establish that the existing framework is appropriate.

Currency Treatment
For perspective, if a foreign investor invests $100 into Indian shares when the exchange rate is ₹80 to the dollar, the investment is worth ₹8,000. After the long-term holding period, the shares are sold for ₹8,800, but the exchange rate has moved to ₹88.

The investor has earned ₹800 in rupees and nothing in dollars. Applying the headline 12.5% rate to the rupee gain produces a ₹100 tax bill, leaving dollar proceeds of about $98.86. The illustration excludes dividends, transaction costs, exemptions, surcharge and cess, but shows how a taxable rupee profit can coexist with a dollar loss.

Indian tax law already recognises currency adjustment in some non-resident transactions, although it is not generally available for comparable long-term listed-equity gains. That precedent makes the proposed extension worth examining, but does not establish that foreign portfolio investors should receive it.

Resident investors can earn nominal gains that do not translate into equivalent increases in purchasing power, while the listed-equity framework does not provide indexation. Currency depreciation and domestic inflation are not interchangeable, but both qualify the assumption that a nominal rupee gain fully represents an investor’s economic return.

The comparison includes both direct shareholders and savers investing through equity mutual funds. Qualifying funds generally receive an exemption at the fund level, while investors face capital gains tax when disposing of their units, without foreign-currency adjustment or indexation under the applicable equity-fund rules.

The question of parity therefore extends beyond the headline rate. If foreign investors receive an adjustment for currency movements while domestic savers remain taxed on unadjusted nominal gains, the government should explain the distinction. Attracting internationally mobile capital may justify different treatment, but the expected investment benefit must be weighed against its revenue and administrative cost.

Policy Assessment
The government must first specify what it expects the relief to achieve. Fresh allocations and a greater willingness to retain existing holdings are different outcomes, neither of which should be assumed from an improvement in after-tax returns. The investment industry needs to substantiate its claims about additional investment, rather than treat a lower tax bill as sufficient evidence.

The dollar proposal also needs a precise account of whose return it would measure. Investors funded in euros or yen may experience different outcomes from dollar-funded investors. A common dollar reference would provide consistency without necessarily reflecting each investor’s return, while recognising different funding currencies would require a broader framework.

The treatment of currency movements should also be symmetrical. If rupee depreciation reduces taxable gains, would appreciation increase them? A calculation operating in both directions would serve a different purpose from a concession recognising only adverse movements.

The administrative assessment should identify the reporting, reconciliation and eligibility requirements that an FPI adjustment would add, including the treatment of losses. Their cost should be measured rather than assumed from the existence of additional rules.

The fiscal comparison needs proposal-specific estimates. Reported government figures put tax attributable to equity LTCG at ₹1.29 trillion for assessment year 2025–26. That is substantial revenue, but the published aggregate does not isolate the FPI contribution or establish the cost of a targeted currency adjustment. Abolition, a common rate reduction and a change in computation would each have different consequences for collections.

The case for reviewing equity taxation is stronger than the case presented so far for dollar-based gains. Before introducing a separate calculation for foreign investors, the government should show why it would achieve more than a common rate change at an acceptable cost. That would give domestic savers a basis for judging whether the difference in treatment serves a wider economic purpose.