* Modi's party favours demand to adjust tax rules: party leader
* Party wants budget to ease investment rules, raise spending
* Finance minister to present annual budget on Feb. 1
By Manoj Kumar and Mayank Bhardwaj
NEW DELHI, Jan 29 (Reuters) - Indian Prime Minister Narendra Modi's party has recommended adjusting rules on taxing equity market returns in the upcoming budget on Feb. 1, which if accepted, could attract more capital inflows into the stock markets, a senior party leader said.
Financial market participants have been lobbying for scrapping long term capital gains tax (LTCG) on investment in equity or equity-oriented funds or extending the holding period from the current one year to two years with nil tax.
India charges 15% short-term capital gains tax if equity shares are sold within a year and at 10% if sold after a year.
Another demand has been for an amendment to dividend distribution tax (DDT) rules.
In pre-budget consultations with the finance minister and the prime minister's office, Bharatiya Janata Party leaders have urged the government to consider industry demands and listed measures to revive investments, Gopal Krishna Agarwal, economic affairs spokesman of BJP, told Reuters in an interview.
"There is a concern on LTCG and DDT...as a lot of financial transactions are moving out of the country to Singapore, Hong Kong and London," Agarwal said.
The long-term capital gain tax of 10% on the sale of equity shares was re-introduced in 2018 by former finance minister Arun Jaitley after a gap of 14 years, much to the disappointment of market participants and has been a major hindrance to foreign investment.
Agarwal said there was a need to reduce the cost of financial transactions in the country.
"These are doable and without putting much financial burden on the government".
Currently, Indian companies pay over 15% dividend distribution tax on declared dividends and investors pay another 10% tax on receiving more than one million rupees ($14,070) dividend in a financial year.
Many tax experts said these rules do not allow foreign investors to claim tax credit in their countries and small investors are forced to pay higher tax.
"It may be worthwhile to consider reverting back to the taxation of dividends in the hands of recipients with a smaller amount being reduced at source," said S.R. Patnaik, Partner & Head-Taxation, Cyril Amarchand Mangaldas, a law firm.
Finance Minister Nirmala Sitharaman, who will present the annual budget to parliament on Saturday, is widely expected to announce a slew of measures of support sputtering economic growth.
($1 = 71.0700 Indian rupees) (Reporting by Manoj Kumar, Editing by William Maclean)