Scrapping the Long-Term Capital Gains (LTCG) tax is unlikely to solve current market issues like high valuations and foreign investor selling. Experts warn that losing over ₹1.29 lakh crore in annual tax revenue would create a major fiscal gap for the government, while failing to address global factors like rising US bond yields that are already driving capital away from Indian markets.
The ongoing debate over whether the government should abolish the Long-Term Capital Gains (LTCG) tax has gained attention as investors look for ways to boost market sentiment. However, economic analysts suggest that removing this tax is unlikely to solve the deeper structural issues currently hurting the Indian stock market. While some investors argue that lower taxes would attract more capital, this view often ignores larger global and domestic economic pressures.
The recent downturn in Indian equities is largely driven by external factors that a domestic tax cut cannot fix. Global conditions, particularly rising bond yields in the United States, have made Indian stocks less attractive to international investors. This shift has led to a significant exit of money, with foreign portfolio investors (FPIs) withdrawing over ₹3.1 lakh crore from the market by early October 2026. Furthermore, the weakening rupee and high oil prices remain major pressure points for the broader economy. These issues affect investor confidence regardless of the tax rate on capital gains.
Beyond global factors, the domestic market is dealing with its own valuation challenges. Many Indian companies are currently trading at expensive prices compared to their actual earnings growth. While steady monthly contributions from domestic investors through Systematic Investment Plans (SIPs) have helped support share prices, this has created a disconnect between current market valuations and corporate performance. Scrapping the LTCG tax would not address these inflated valuations and could simply encourage more money to flow into an already expensive market, without necessarily improving company fundamentals.
From the government’s perspective, the fiscal cost of removing the LTCG tax is a major hurdle. The tax collection from LTCG reached ₹1.29 lakh crore in the 2024-25 fiscal year, making it a vital source of income for the Union Budget. If the government eliminates this revenue, it would face a difficult choice between reducing essential spending on infrastructure and development or allowing the fiscal deficit to rise. The government is already managing tight budgets due to global energy prices and the need for GST rationalization, leaving little room to lose such a significant income stream.
Ultimately, market health depends on corporate earnings growth and macroeconomic stability. Investors should monitor these factors, along with interest rate trends and corporate profitability, rather than expecting tax policy changes to drive a sustained market rally. The potential for systemic bias against corporate profitability also exists if tax disparities between capital gains and dividends are widened, which could further complicate the investment environment.