LTCG tax cut ahead? History, India China Korea comparison and Jefferies' top stock picks -

Jefferies, in its latest strategy note, cited chatter around a potential cut in long-term capital gains (LTCG) tax on equities, saying the possibility of differential equity taxation for foreign portfolio investors (FPIs) cannot be ruled out. The global investment bank said an out-of-budget change in capital gains tax rates is feasible through the Ordinance route, similar to the recent tax relief granted to specific foreign investors in Indian government bonds.

"For equity taxes, policy options include 1) an across-the-board LTCG & STCG rate cut, 2) FPI-specific LTCG rate cut, or 3) Computing gains for FPIs in dollar terms (i.e. some indexation benefits). Industry participants suggest too high differential between LT and ST rates can be suboptimal," it said.

Jefferies said equity LTCG collections stood at Rs 1.3 lakh crore in FY25, coinciding with the peaking of Indian markets, though collections could be lower now. For FY27, securities transaction tax (STT) collections are annualising at Rs 85,000 crore. Combined, LTCG tax on equities and STT accounted for 8 per cent of direct tax collections and 5 per cent of total gross tax revenue in FY25, it said.

"Given fiscal pressures, the government may need to offset potential revenue loss from any LTCG tax reduction," it said.

Jefferies said LTCG on equities is exempt for FPIs in several emerging markets. In India, FPIs face a tax incidence similar to that of other investors, with LTCG taxed at 12.5 per cent and short-term capital gains (STCG) at 20 per cent.

"Notably, though FPIs earlier used to benefit from investments via tax-friendly jurisdictions under Double Tax Avoidance Agreements (DTAAs), the routes for which have been largely closed since Apr19. However, chances of a differential treatment for FPIs on equity taxation cannot be ruled out," it said.

LTCG tax: India-China-Korea comparison

In India, short-term gains are taxed at 20 per cent and long-term gains at 12.5 per cent, while STT is levied at 0.10 per cent on both buying and selling of shares. In South Korea, 11 per cent of sales proceeds or 22 per cent of net gains are taxed. STT in South Korea is levied at 0.20 per cent on the seller only. In China, gains on some shares are exempt, while others are taxed at 10 per cent.

LTCG tax cut: Stocks likely to be key beneficiaries

A potential reversal in FPI flows could particularly benefit stocks in sectors that have seen heavy foreign selling, Jefferies said. Since October 2024, financials have seen the largest net FPI outflows at $16 billion, followed by IT and staples, at $10 billion each.

"Within these oversold sectors, Banks are our key preference, while we also prefer Energy (RIL), Utilities & Real Estate. Overall, we prefer large caps over mid-caps. Large caps have UPFed by 5ppt in 2026, trade at a 23 per cent valuation discount vs the 10-year avg of 20 per cent, even as the earnings-growth gap is expected to narrow," it said.