Budget 2026: There is a lot of clamor in the Indian stock market for a reduction in the long-term capital gains (LTCG) tax amid the sharp underperformance by the Indian stock market over the past year, amid relentless selling by foreign portfolio investors (FPIs).
Last year, the BSE Sensex rose almost 9% as it extended its annual bull run to the 10th year in a row. However, this return was comparatively much smaller than the 16-68% returns offered by some of its Asian peers, including Pakistan’s KSE 100 index.
India’s underperformance last year was not about weak fundamentals, but about sentiment and missing foreign flows. The Indian stock market faced a record FPI selloff witnessed in 2025, which is continuing this year as well, amid a weakening Indian rupee, an elusive India-US trade deal and also slowing earnings growth.
According to data from NSDL, FPIs have net sold ₹33,598 crore worth of Indian stocks in January so far, the highest monthly outflows since August 2025. Last year, the FPI selloff hit ₹166,286 crore as foreign investors remained net sellers in eight out of 12 months of 2025.
The sustained selling by FPIs this year led to a 2.5% decline in Nifty for the week ended 23rd January, resulting in erosion of ₹16 lakh crore of market cap in a week.
Call for lower LTCG tax in Budget 2026
Against this backdrop, key market expectations include steps to improve investor sentiment by reducing LTCG tax to 10% and rolling back STT to encourage higher FPI participation.
The government reintroduced the LTCG tax on equities in Budget 2018 at the rate of 10% with an exemption of ₹1 lakh. But in 2024, the LTCG tax rate was raised to 12.5% ​​with an exemption limit of ₹1.25 lakh, and STCG was raised to 20% from 15% earlier.
Can lower LTCG tax spur FPI buying?
Khushi Mistry, Research Analyst at Bonanza, said the demand for lower capital gains taxes merits consideration amid 2025’s market underperformance and FII outflows, as cuts historically boosted retail participation (eg, 2004 LTCG exemption era).
While such a move could emerge as a positive signal for long-term investors, it is unlikely to be a standalone trigger to reverse the ongoing FPI sell-off, according to analysts, with no meaningful reversal expected in the absence of earnings recovery.
“Even a modest cut in LTCG would improve post-tax returns at the margin, but it does not materially change the risk-reward equation for large offshore funds that allocate capital based on growth durability, liquidity depth, and macro stability,” opined Harshal Dasani, Business Head at INVasset PMS.
Mistry, too, believes that reductions could trigger short-term rallies via sentiment lift, like post-2004 gains, but won’t guarantee bull runs without earnings growth. “Tax tweaks aid, but macros/FII flows dominate.”
Two factors can resume FPI buying in India, as per Dr VK Vijayakumar, Chief Investment Strategist, Geojit Investments Limited — improvement in corporate earnings and the India-US trade deal.
He said the former is likely in Q4 FY26, but there is no clarity at all on the timeline of the latter. This is the biggest uncertainty weighing on the market now, according to the veteran market expert.
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