Increase in Long-Term Capital Gains (LTCG) Tax on FII Income to 12.5% from 2026
The Finance Bill 2025 has proposed a significant change in the taxation of long-term capital gains (LTCG) for foreign institutional investors (FIIs). After a hike to 12.5% on LTCG from listed equity shares, equity-oriented mutual funds, and business trust units in last year’s Budget, this new proposal aims to raise the LTCG tax rate on income from certain other securities from the existing 10% to 12.5%. This change will take effect starting April 1, 2026.
Key Highlights of the Proposed Tax Changes
Under Section 112A of the Income-tax Act, LTCG tax on the sale of listed equity shares, equity-oriented mutual funds, and business trust units was already increased to 12.5% for FIIs in the previous Budget. The Finance Bill 2025 aims to harmonize the tax rate for all FIIs, bringing the tax rate on LTCG from certain other securities under Section 115AD to 12.5%.
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According to the Bill, the income tax on long-term capital gains, excluding those referred to in Section 112A, will be calculated at a 12.5% rate. This change applies to income from the transfer of securities that are not covered under Section 112A or Section 115AB, which typically deals with specified funds.
Impact and Timeline of the Changes
These tax changes are set to be implemented from April 1, 2026, and will affect the assessment year 2026-27 and beyond. This means that the new rates will apply to any LTCG income earned from the transfer of securities (other than those under Section 112A or Section 115AB) starting from that date.
Comparison with Previous Tax Provisions
Before this amendment, LTCG tax on certain securities for FIIs under Section 115AD was taxed at a rate of 10%. However, this rate will now be increased to 12.5%, aligning the tax treatment with the rates applicable to residents under similar circumstances.
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FII Activity Trends in 2024
The proposal comes at a time when FII activity in the Indian market has been notably subdued. In 2024, FIIs invested a net amount of just over Rs 1,600 crore, a sharp decline of 99% compared to the previous year’s inflows of Rs 1.71 lakh crore. This sharp reduction in FII investment activity was largely attributed to economic slowdowns and weaker corporate earnings in India. Notably, FIIs sold over Rs 2.63 lakh crore worth of stocks since October 2024.
Section 112A and Its Role
Section 112A, introduced by the Finance Act 2018, imposes tax on long-term capital gains arising from the sale of listed equity shares, equity-oriented mutual funds, and business trust units. The Finance Bill 2025’s proposal to increase LTCG tax will further align the taxation framework for foreign investors and domestic entities.
Increase in Long-Term Capital Gains (LTCG) Tax on FII Income to 12.5% from 2026
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