Long-Term Capital Gains refer to the profits earned from selling assets or investments held for more than a specified period, typically over one year. The exact holding period can vary depending on the type of asset:
- Equities and Mutual Funds: Held for more than 12 months.
- Real Estate and Gold: Held for more than 24 months.
- Other Assets: Specific rules apply based on the asset type and jurisdiction.
LTCG Tax Rates for Residents and Non-Residents in India
Residents
- Equity Shares and Equity-Oriented Mutual Funds: LTCG exceeding ₹1.25 lakh is taxed at 12.5% without indexation for sales made on or after July 23, 2024.
- Real Estate: LTCG is taxed at 20% with indexation for sales before July 23, 2024. For sales on or after July 23, 2024, the rate is 12.5% without indexation, with an option to choose between the two rates for properties acquired before July 23, 2024.
- Other Assets: Generally taxed at 12.5% without indexation for assets held for more than the specified period (e.g., 24 months for debt instruments).
Non-Residents (NRIs)
- General LTCG: Taxed at 20% with indexation benefits.
- Specific Assets: For property, LTCG is taxed at 20% with indexation or 12.5% without indexation for properties acquired before July 23, 2024.
- TDS: A withholding tax (TDS) of 20% is applicable on LTCG for NRIs
Tax Rate For FIIs in India
Foreign Institutional Investors (FIIs) in India are subject to taxation under Section 115AD of the Income Tax Act of 1961. This section specifies the tax rates applicable to income generated from securities and capital gains resulting from their transfer.
Tax Rates
Income from Securities: Taxed at 20% for FIIs and 10% for specified funds (e.g., certain Alternative Investment Funds).
Short-Term Capital Gains (STCG)
For equity shares or units of equity-oriented funds, taxed at 15% if Securities Transaction Tax (STT) is paid.
For other securities, taxed at 30%.
Long-Term Capital Gains (LTCG)
Generally taxed at 10% without indexation for FIIs, except for certain securities where LTCG might be exempt if STT is paid.
Budget Update
The Union Budget 2025 introduced minor amendments to the capital gains tax framework while keeping the tax rates and holding periods unchanged. These regulations will apply to a range of assets, including shares, mutual funds, bonds, debentures, unlisted shares, real estate, and other financial instruments for 2026 (Assessment Year 2026-27).
Notably, the new long-term capital gains (LTCG) tax rate for Foreign Institutional Investors (FIIs) will not begin on April 1, 2025, but will take effect on April 1, 2026, as outlined in the Finance Bill 2025. This adjustment raises the LTCG tax rate on certain securities from 10% to 12.5%, bringing it in line with the rates applicable to residents for similar assets.
“It is proposed to amend the provisions of section 115AD to provide that income-tax on the income by way of long-term capital gains on transfer of securities (other than units referred to in section 115AB) not referred to in section 112A, if any, included in the total income, shall be calculated at the rate of 12.5 per cent,” the Bill said.
“These amendments will take effect from the April 1, 2026, and shall accordingly, apply in relation to the assessment year 2026-27 and subsequent assessment years,” it said.
Points to be noted
Effective from April 1, 2026, the LTCG tax rate for FIIs on all securities, including those not covered under Section 112A, will be increased to 12.5%. This change aims to bring parity in taxation between residents and non-residents.
The new rate will be effective starting from the assessment year 2026-27 and will establish a consistent approach to taxing long-term capital gains (LTCG) across various types of securities.
- Current Rate (until March 31, 2026): 10% for securities not covered under Section 112A.
- Future Rate (from April 1, 2026): 12.5% for all securities, aligning with the rates for residents.
The new Long-Term Capital Gains (LTCG) tax rate that will be effective from the assessment year 2026-27 is designed to create a consistent tax structure across various types of securities. This means that whether investors are dealing with stocks, bonds, or other forms of investments, they will be subject to the same LTCG tax treatment.
This initiative seeks to:
Enhance Fairness: By applying a uniform rate for all investors—both domestic and foreign—it eliminates any preferential treatment that may have existed under the previous tax system.
Encourage Investment: A clearer and more predictable tax structure could attract more investors to the market, as they will have a clearer understanding of their tax obligations.
Improve Compliance: Streamlining the tax system may lead to better compliance among investors, as a single rate is simpler to manage and calculate compared to a complex, varied framework.
Overall, this change is part of a larger effort to create a more transparent and investment-friendly atmosphere in India.
FAQs
The grandfathering provision primarily affects individual investors rather than Foreign Institutional Investors (FIIs) directly. However, understanding how it works can provide insight into how tax changes are managed for all investors, including FIIs.
For long-term capital gains, grandfathering was notably applied to investments made before January 31, 2018. Gains accrued up to this date are not taxed under the new LTCG regime introduced in 2018, which applies to equity shares and equity-oriented mutual funds.
FIIs are subject to specific tax rates and regulations, which may not directly benefit from the grandfathering provisions applicable to individual investors.
Currently, LTCG on unlisted securities (not covered under Section 112A) is taxed at 20% with indexation benefits for residents. However, for FIIs, the LTCG tax rate on such securities is generally 10% without indexation benefits.
The Finance Bill 2025 proposes to increase the LTCG tax rate for FIIs on securities not covered under Section 112A from 10% to 12.5%, effective April 1, 2026. This change aims to align the tax rates for FIIs with those applicable to residents for certain securities.
The proposed increase in LTCG tax rates from 10% to 12.5% will result in a higher tax liability for FIIs on the sale of unlisted securities that are not covered under Section 112A.
This change aligns FIIs’ tax rates more closely with those of residents, promoting uniformity in taxation across different investor types.
The new long-term capital gains (LTCG) tax rate of 12.5% for Foreign Institutional Investors (FIIs) in India is generally competitive compared to other countries. Here’s a comparison:
United States: The LTCG tax rate in the U.S. can be up to 20% depending on income levels, with lower rates for lower-income earners.
United Kingdom: The U.K. also has higher LTCG rates, often up to 20% or more depending on the taxpayer’s income bracket.
Thailand and Malaysia: These countries have higher LTCG tax rates compared to India’s new rate.
Singapore and UAE: Both countries do not impose capital gains tax, making them more attractive from a tax perspective.
China: China has a flat 20% LTCG tax rate, though certain stock exchange transactions are exempt.