Amid relentless foreign institutional investor (FII) selling, rising geopolitical tensions in West Asia, and heightened volatility in Indian equities, ace investor Vijay Kedia has reignited the debate around India’s long-term capital gains (LTCG) tax regime, calling for its complete abolition to strengthen long-term investing and deepen domestic capital formation.

The demand comes at a time when benchmark indices remain under pressure, down nearly 10% year-to-date (YTD), as soaring crude oil prices, inflation concerns, and persistent foreign outflows weigh on investor sentiment.

Foreign institutional investors (FIIs) have remained net sellers in every month of calendar year 2026 so far, pulling out over ₹2.3 lakh crore from Indian equities, already surpassing the total outflow of ₹1.66 lakh crore recorded in 2025.

Selling intensified sharply in March, when overseas investors offloaded a record ₹1.23 lakh crore worth of shares amid escalating tensions surrounding the U.S.-Israel-Iran conflict. This was followed by another ₹70,135 crore of net selling in April, reflecting sustained risk aversion toward emerging markets.

Despite the heavy foreign outflows, domestic institutional investors (DIIs) have provided strong support to the markets, investing over ₹3 lakh crore into equities so far this year through mutual funds, insurance companies, and pension funds.

Against this backdrop, Kedia argued that India’s tax framework should encourage patient long-term capital rather than treat long-term investors and short-term traders alike.

Kedia's suggestions to FM Sitharaman

In a message addressed to Finance Minister Nirmala Sitharaman, Kedia urged the government to abolish long-term capital gains tax on listed equities and end the double taxation of dividend income to strengthen India’s capital markets.

“Long-term capital gains tax on listed equities should be abolished. A long-term shareholder is not a speculator but a provider of patient risk capital,” Kedia said in a post on microblogging platform X.

According to him, India requires massive pools of long-term domestic capital to build globally competitive enterprises, infrastructure, and innovation-led businesses. He added that tax policy should incentivise households to shift savings away from passive assets such as gold and toward productive financial assets that generate jobs and economic growth.

Kedia also pointed out that governments already earn substantial revenues during a company’s growth cycle through corporate taxes, GST, customs duties, stamp duties, and income tax collections, making LTCG taxation an additional burden on wealth creation.

“Tax policy should reward long-term ownership of productive businesses and distinguish it from short-term speculation,” he said.

The veteran investor also argued that dividend income from listed equities should not face double taxation, saying such a structure discourages long-term equity participation. He pointed out that companies pay dividends out of profits that have already been taxed at the corporate level, after which shareholders are taxed again on the same income. On the other hand, interest paid on debt is treated as a business expense and deducted before tax, even though lenders bear lower risk compared to equity investors.

The debate over equity taxation resurfaced after the government, in Union Budget 2024, raised the LTCG tax rate on equities from 10% to 12.5%, while increasing the exemption threshold from ₹1 lakh to ₹1.25 lakh annually. The July 2024 overhaul also introduced a more uniform capital gains taxation structure across equities, mutual funds, bonds, gold, and real estate.

Currently, gains on listed equities and equity mutual funds held for more than one year are taxed at 12.5% beyond the exemption limit.

While Kedia’s remarks have resonated with a section of market participants, not everyone in the financial community agrees with abolishing the tax.

Shankar Sharma asks why market veterans didn’t oppose LTCG earlier

Ace investor Shankar Sharma questioned why industry veterans were largely silent when the tax was first introduced in 2018 and later increased.

“I remain confounded at the vocal cries of my fellow financial veterans asking for abolition of LTCG. Why did we not hear them say the same thing when these taxes were actually imposed and then increased?” Sharma posted on X.

The original LTCG tax on equities was reintroduced on April 1, 2018, at a rate of 10% on gains exceeding ₹1 lakh annually, after being exempt for more than a decade. A grandfathering provision protected gains accrued until January 31, 2018.

FM says govt is open to hearing industry concerns

Meanwhile, Finance Minister Nirmala Sitharaman recently indicated that the government remains open to hearing concerns from investors regarding the current tax structure.

“On this particular issue or any other issue, we are always ready to listen to the people. We will certainly take their inputs,” Sitharaman said while responding to queries around LTCG and short-term capital gains (STCG) taxation on May 25.

Though no formal review has been announced yet, market experts believe any moderation in equity taxation, particularly amid rising global uncertainty and sustained FII outflows, could improve investor confidence and support market sentiment.

Analysts, however, remain divided on whether reducing LTCG taxes alone would meaningfully reverse foreign selling trends, which are currently being driven more by global risk aversion, elevated U.S. bond yields, rising crude oil prices, and geopolitical uncertainty.