SEBI Wants the 12.5% LTCG on Foreign Stocks Scrapped — What Budget 2027-28 Could Do to Your Capital Gains Tax

The market regulator has now entered the capital-gains debate. SEBI has proposed removing the 12.5% long-term capital gains (LTCG) tax on foreign equity investments, putting the question squarely before the government ahead of Budget 2027-28.

What SEBI has actually proposed

Two asks from the regulator:

1. Remove the 12.5% LTCG tax on foreign equity. The stated aim is to stop the capital flight — foreign portfolio investors have withdrawn over ₹3 lakh crore from Indian equities — and to keep India’s stock market competitive with other Asian markets that tax long-term gains at zero or near-zero rates.
2. Let mutual funds switch schemes tax-free after one year. At the moment, moving from one scheme to another — even within the same fund house — is treated as a sale and taxed. SEBI wants that to change for switches held a year or more.

This follows the Finance Minister’s earlier signal that she is open to hearing views on LTCG — which we covered in our LTCG removal report after the FM’s Budget 2027 signal. SEBI’s proposal turns that signal into a concrete ask from the regulator itself.

What investors are asking for on top

The market’s wish list goes further than SEBI’s proposal:

• Abolish LTCG entirely. Some investors want the 12.5% rate gone for everyone, not just foreign equity — a return to the pre-2018 position when long-term equity gains were exempt.
• Cut STCG from 20% to 10%. The short-term rate was raised to 20% in July 2024. Traders argue it discourages liquidity and pushes activity offshore.
• Lower STT. Securities transaction tax is levied on every trade on top of the capital gains tax — investors want both to come down.
• Grandfathering for older gains. If rules change, protect gains accrued under the old regime.

The rates today — what you actually pay now

For the full mechanics of how fund gains are taxed today, see our mutual fund and SIP taxation guide — equity 12.5%, the debt-fund rule change and grandfathering.

What it would mean for your money

Take an investor with ₹2,75,000 of long-term gains on listed shares this year:

• Today: the first ₹1,25,000 is exempt; the remaining ₹1,50,000 is taxed at 12.5% = ₹18,750.
• If LTCG is abolished entirely: ₹0 — the whole ₹18,750 stays with you. If LTCG were abolished, that whole ₹34,375 would stay with you. If instead only the foreign-equity LTCG went, as SEBI proposes, a domestic investor’s bill wouldn’t change at all.
• If STCG is cut to 10%: A ₹2 lakh short-term gain would cost ₹20,000 instead of ₹40,000. But note the trade-off the government will weigh: cheaper short-term trading also means more speculation, which is exactly what the 20% rate was meant to discourage.

If LTCG is abolished entirely: Every long-term equity gain becomes tax-free, as it was before 2018. The ₹1.25 lakh exemption becomes irrelevant. This is the most investor-friendly outcome — and the most expensive for the exchequer, which is why it is also the least likely in full.

What to do before Budget 2027-28

• Don’t book losses or gains on rumours. SEBI’s proposal is not a government decision, and the FM has not promised anything. Selling to “beat” a change that never comes is the most common way investors lose money in Budget season.
• Harvest your ₹1.25 lakh LTCG exemption. It exists today regardless of what happens in the Budget. Booking gains up to the exemption each year is free money — our income tax hub has the year-end planning guides, including the loss-harvesting checklist.
• Check your holding period. The 12-month line between STCG (20%) and LTCG (12.5%) is where most of the tax is won or lost. A sale one week early can double your rate.
• Keep records of every switch. If SEBI’s tax-free switch idea becomes law, your fund house will need clean records of when each switch happened. Start keeping them now.
• Plan your March decisions now. The Budget is in February; the financial year ends in March. If you are considering a big sale, the timing — before or after the Budget — could matter. Our deductions hub collects every exemption and deduction worth checking before March.

How likely is any of this?

SEBI’s proposal gives the government a strong reason to act: foreign outflows above ₹3 lakh crore are a real, measurable problem, and a targeted cut for foreign investors costs far less revenue than abolishing LTCG for everyone. The most likely outcome, if anything changes, is the narrow one — foreign-equity LTCG goes, domestic rates stay. The broad abolition and the STCG cut to 10% are negotiating positions, not the expected result.

Watch for the Budget speech on 1 February 2027 — that’s when the answer comes.

FAQs

Has the government abolished LTCG tax?
No. SEBI has proposed removing the 12.5% LTCG tax on foreign equity investments, and the Finance Minister has said she is open to hearing views. Nothing has been decided — the Budget in February 2027 is the decision point.

Would SEBI’s proposal help domestic investors?
Not directly. SEBI’s ask is limited to foreign equity. Domestic investors would benefit only if the government goes further and abolishes LTCG for everyone, which is what some investors are demanding.

What is the current LTCG rate on listed equity?
12.5% on gains above the ₹1.25 lakh annual exemption, for shares held more than 12 months. Short-term gains (held 12 months or less) are taxed at 20%.

Are mutual fund switches taxed today?
Yes — switching from one scheme to another is treated as a sale of the old units, and the gain is taxed. SEBI has proposed making switches tax-free after a one-year holding period.

Should I sell before the Budget?
Don’t act on rumours. The proposals are not decisions, and booking gains or losses to beat a change that never happens is a common and costly mistake.

Sources

SEBI’s proposal to remove the 12.5% LTCG tax on foreign equity investments and allow tax-free mutual fund switches after one year, and investor demands for LTCG abolition, an STCG cut to 10% and lower STT, as reported by CAClubIndia’s income-tax news coverage in November 2026, citing foreign portfolio outflows of over ₹3 lakh crore. Current capital-gains rates are from the Finance Act, 2024 (July 2024 overhaul): LTCG on listed equity at 12.5% above the ₹1.25 lakh annual exemption, STCG at 20%. The Finance Minister’s openness to hearing views on LTCG is as noted in Budget 2027-28 expectations coverage. For how family gifts and transfers interact with capital gains, see our clubbing rules explainer — when income from assets in your spouse’s name is taxed in your hands.