Foreigners to pay LTCG on par with local investors at 12.5 percent, up from 10 percent

The same level of capital taxes will be levied on persons, irrespective of their country of origin - 15 per cent for short-term gains and 12.5 per cent for long-term gains.
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Image used for representation purposes only.(File Photo)
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MUMBAI: The budget has taken away the lower capital gains tax rate that foreign funds (foreign portfolio investors) enjoyed over the locals by bringing them on par with the latter who are taxed at 12.5 per cent.

Foreign investors were paying only 10 per cent in capital gains on their profits made from sale of listed bonds, debentures, preference shares, and unlisted securities. The goal is to make the tax rate for non-residents the same as the rate for residents on listed securities and traded bonds.

The same level of capital taxes will be levied on persons, irrespective of their country of origin - 15 per cent for short-term gains and 12.5 per cent for long-term gains. Thus the proposal brings parity on listed and unlisted securities as well as others investment tools like debentures, preference shares and bonds.

Announcing the changes, the finance minister said in her budget speech that the revised long-term capital gains tax (LTCG) for foreign portfolio investors will be 12.5 per cent from April 1, 2026, and not from this April which normally is when budget proposals get kicked in.

The new rate will align the tax rate for FPIs with the rate for listed shares and equity-oriented mutual funds and will apply to the assessment year 2026-27 and beyond. With this revision, the government aims to create parity in capital gains taxation between residents and non-residents.

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Tax on long-term capital gains (LTCG) for listed bonds, debentures and listed preference shares raised to 12.5 per cent from 10 per cent under the provisions of Section 112A provides for LTCG tax on the sale of listed equity shares, equity-oriented mutual funds and business trust.

"It was seen that while the rates of taxation in the case of specified funds or FIIs in case of long-term gains referred to in section 112A have been brought to parity width the rates applicable for residents, the rate of income-tax calculated on the income by way of long term capital gains not referred to in section 112A was retained at 10 per cent vide Finance Act, 2024,” says the budget document.

Section 112A provides for LTCG tax on the sale of listed equity shares, equity-oriented mutual funds and business trust. The tax rate on these listed securities was raised to 12.5 per cent from July 2024 for gains exceeding Rs 1.25 lakh.

According to Sunil Gidwani, a partner at tax consultancy Nangia Andersen, last year when the LTCG tax rates were changed for residents, the tax rates for FPIs on shares, equity mutual funds and business trusts were also changed to 12.5 per cent but LTCG on other assets such as G-secs, bonds and NCDs were left out for them, perhaps inadvertently, and continued to be taxed at 10 per cent.

"This is sought to be corrected,” he added.

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