Outrage over taxes is now fashionable on Dalal Street. Fund managers who cannot deliver on the returns they promised their investors are conveniently blaming the government for imposing tax on foreign portfolio investors and citing it as the chief reason for the historic sell-off in Indian markets.
The holy trinity of Dalal Street grievances — Long Term Capital Gains tax, Short Term Capital Gains tax, and Securities Transaction Tax — now has its own loud chorus of self-appointed market oracles who dominate business news channels and have crowned themselves as the voice of the Street. And I'll confess: for a long time, they had me convinced too. Taxes on markets had killed India's appeal. I believed it.
Then I looked at the data. And I was wrong.
Let me say what apparently needs saying: India's LTCG, STCG and STT are not the reason FPIs dumped ₹2.75 lakh crore of Indian equities over the past one year. They never were. Anyone telling you otherwise is either economically confused or sitting on a very large book that has gone very, very wrong. The taxes didn't break the market. The taxes saved India. And that is the story nobody on financial television wants to tell you.
But first — here is the tell.
LTCG on equities was reintroduced in 2018. It has been sitting there in plain sight for seven years. And yet, for six of those seven years — as the Sensex climbed from 35,000 to over 85,000, as FPI money poured in and bull market conferences filled up with fund managers explaining their own genius to each other — not one of them marched on Parliament demanding the abolition of LTCG. They lived with it. They invested through it. They made fortunes through it. The tax became an urgent civilisational threat only after the returns dried up and portfolios started bleeding. You do not need a PhD in economics to understand what that timing reveals. You just need to be paying attention.
A world on fire — and you're blaming the taxman?
Let's look at what actually happened, because the world has been rather busy.
India's IT sector was not just the backbone of the economy — it was the spine, the ribcage, and both femurs. TCS, Infosys, Wipro, HCL: these were the dollar-earning machines that kept the rupee stable and the current account from imploding. The model was elegant. Global companies outsourced their technology work to India. Dollars flowed in. The rupee held. Everyone was happy. Then came generative AI — and not the gentle disruption kind, the full demolition kind. Microsoft didn't need ten thousand Indian coders when Copilot could do it in seconds. Google, Amazon, Accenture, IBM — the very clients whose cheques kept Indian IT humming — started reallocating budgets from Bengaluru to foundation models. Revenue guidance at the big IT firms got slashed, then slashed again. Foreign investors who held these stocks as a proxy for India's growth story found themselves holding a proxy for yesterday's story. Was any of this LTCG's fault? Please.
Then oil got complicated. India imports 85 percent of its crude oil, which means every tremor in West Asia arrives on our import bill. The Iran escalation, the Red Sea disruptions, the unpredictable energy market — the current account deficit widened, the rupee came under pressure, and remittances from the Gulf and the US softened as tech layoffs and tighter visa environments reduced what the Indian diaspora could send home. The rupee's support structure weakened structurally, from multiple directions, simultaneously.
Moreover, Trump had come back to the White House bearing tariffs for everyone. Blanket. Random. Chaotic. Global capital fled to the dollar, and every emerging market — Brazil, Indonesia, South Korea, India — took the hit simultaneously. This was not India-specific. This was a global risk-off stampede triggered by one man's trade policy and a commerce department that appeared to be making decisions with a dartboard. Fund managers who didn't see this coming — and many of them didn't, because they were too occupied blaming government taxes for their own positional errors — need to reconsider their profession seriously.
AI. Oil. Trump. War. These are the architects of ₹2.5 lakh crore of FPI selling. Not 12.5 percent on equity profits above ₹1.25 lakh. Or STT.
The part nobody wants to discuss
Here is the fact that has been carefully buried in this entire noisy debate: FPIs who sold Indian equities at a profit paid LTCG and STCG to the Indian government on their way out. India taxed its own exit. Without these taxes, that capital would have simply walked out of the country — cleanly, freely, not leaving a rupee behind. India would have provided the companies, the consumers, the courts, the exchanges, twenty years of extraordinary growth — and in return, received nothing. Instead, the exchequer collected its share. At the precise moment when AI was undermining IT export earnings, oil was expensive and the current account was under pressure, the Capital Gains tax on profitable FPI exits quietly cushioned India's fiscal position. So did the STT.
The taxes that are being called a bane were, in practice, a fiscal stabiliser. That is the irony: the critics are desperate to prevent becoming common knowledge.
And since the international comparison keeps being avoided: the American investor in California pays an effective capital gains rate exceeding 33 percent, between federal and state levies. France charges 30 percent. Germany 26 percent. The UK up to 24 percent. None of their markets collapsed under this injustice. The Nasdaq did not crash because California taxes capital gains aggressively. Market performance is driven by earnings, growth and global liquidity — not by whether the rate is 12.5 or 15 percent. The entire argument is a non-sequitur delivered on television with great conviction and zero evidence.
One more inconvenient fact
The real carnage in Indian markets has been in small and midcap stocks — names down 40, 50, 60 percent from their peaks. This is where retail investors have truly been hurt. But here is the thing: FPIs, by mandate and liquidity requirements, barely participate in small and midcap stocks. The bloodbath in that space was driven entirely by domestic retail and high networth investors chasing overvalued momentum stories, overleveraged operator positions unwinding, and valuations that had no connection to reality. It was homegrown. The same industry that is now on television blaming LTCG for market destruction was cheerfully recommending those stories on the way up and collecting fees while doing so. Ask yourself who encouraged the retail investor into those names. Then ask yourself who is on television explaining why it's the government's fault.
A message worth sending to Raisina Hill
Madam Finance Minister, Honourable Prime Minister — if this column reaches your desk: the decision to reintroduce and strengthen capital gains taxation on equities was correct. You taxed profits, not capital. You allowed loss adjustments. You aligned India with every serious capital market on earth. You did not chase away investment — global macro did that, and would have regardless. What you ensured was that when the tide went out, India was not left empty-handed. The noise from Dalal Street is not the sound of a broken economy. It is the sound of people whose leveraged bets went wrong, searching for a scapegoat that isn't the mirror. Don't give them one.
The fund managers can keep tweeting. The brokers can keep explaining themselves on YouTube. But the timeline, the data, and basic logic will keep telling the same inconvenient truth: India's capital gains taxes did not cause the FPI exodus. They just made sure India got paid while it happened.
FPIs made fortunes here over two decades. India gave them the growth, the companies, the consumers, the democracy, the rule of law, and a market they could exit freely the moment a better opportunity appeared elsewhere. When they finally chose to leave, India asked for 12.5 percent of the profits on their way out and STT on transactions.
Some people, apparently, found that unreasonable.
India should not. |
