Amid sustained foreign selling, investors are closely watching whether Finance Minister Nirmala Sitharaman will announce relief measures in the Union Budget to revive FPI sentiment, particularly on long-term capital gains (LTCG) tax. Currently, LTCG arises from the sale of capital assets such as stocks and property held for more than 24 months and is taxed at 12.5% across all capital assets. However, in the case of listed equity shares, equity-oriented mutual funds and units of business trusts, gains up to ₹1.25 lakh are exempt from tax.

Amid sustained foreign selling, investors are closely watching whether Finance Minister Nirmala Sitharaman will announce relief measures in the Union Budget to revive FPI sentiment, particularly on long-term capital gains (LTCG) tax. Currently, LTCG arises from the sale of capital assets such as stocks and property held for more than 24 months and is taxed at 12.5% across all capital assets. However, in the case of listed equity shares, equity-oriented mutual funds and units of business trusts, gains up to ₹1.25 lakh are exempt from tax.

VK Vijayakumar, Chief Investment Strategist at Geojit Investments Limited, said expectations of sweeping tax relief are muted this year, given the substantial income tax cuts announced in the 2025 Budget. However, selective tweaks remain possible. “If there is an increase in the exemption limit for long-term capital gains tax from the current ₹1.25 lakh to a higher threshold, that would be positive for the market,” he said.

With FPIs continuing to pull out funds, the government may consider easing tax frictions in equities, said Sunny Agrawal, Head of Fundamental Research at SBI Securities. “There are high chances that the government may reduce LTCG, increase the exemption limit for the computation of capital gains, or lower the securities transaction tax (STT) on cash transactions,” he said.

Agrawal cautioned that markets could be disappointed by any sharp deviation from the fiscal consolidation path, an increase in capital gains taxes, or a material cut in capital expenditure. On the other hand, income tax relief, progress on public sector reforms, and reductions in LTCG or STT would be received positively by investors.

Raising concerns over India’s tax competitiveness, Rajeev Gupta, Executive Vice President and Business Head-Third-Party Products at Religare Broking, said high personal tax rates risk pushing both capital and talent out of the country. “Our highest earners (₹2 crore-plus) currently face a peak tax rate of nearly 39–43%. This isn’t just a tax; it’s an exit trigger,” Gupta said, calling for rationalisation of surcharges and a cap on the effective tax rate at 30 per cent.

Gupta also flagged the impact of higher capital gains taxes on long-term investing. “The 12.5 per cent LTCG tax has created a ‘friction of success’. We urge a return to the 10 per cent LTCG regime,” he said, adding that taxing inflationary gains discourages long-term wealth creation.

From a broader market perspective, Vijayakumar reiterated that a fiscally prudent and growth-oriented Budget remains the key trigger for equities. He also pointed to market chatter around a possible exemption from LTCG tax for certain categories of foreign institutional investors (FIIs). “If such a move materialises, it could trigger a rally in the market,” he noted.

On the sectoral front, Vijayakumar said a higher allocation for defence is largely expected, keeping defence stocks in focus. Exports, particularly manufacturing exports highlighted in the Economic Survey, could emerge as another thrust area, placing export-oriented sectors on investors’ radar.

He added that announcements related to PSU bank mergers and the government’s disinvestment roadmap will be closely tracked. Beyond Budget-related cues, the recent sharp correction in precious metal prices could also prompt investors to shift allocations back towards equities.

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