SBI economists call for scrapping LTCG tax on equities

Amid heavy outflows, economists at the country's largest lender, SBI, on Monday called for abolishing the long-term capital gains (LTCG) tax on equities which can help ensure such investors stay invested longer.

"The government must seriously look into anchoring hot money flows into equity segment by extending the holding period to say 2-3 years and abolishing the long-term capital gains tax for equity," SBI Research said in its Ecowrap report on Monday.

The proposal aims to anchor volatile foreign capital flows in the equity segment and reduce the risk of sudden outflows that can put pressure on the rupee.

Currently, foreign portfolio investors pay the 12.5% LTCG tax on equity investments.

The Union Budget 2026 maintained the status quo on the 12.5% LTCG tax rate for listed equities and equity mutual funds, extending a framework established during a major fiscal overhaul in 2024.

Foreign investors have withdrawn ₹44,166 crore from Indian equities so far in October, bringing the total outflows this year to more than ₹3 lakh crore as elevated crude oil prices, a firmer US dollar and higher US bond yields weigh on investor sentiment. Also, the artificial intelligence-led rally in North Asian markets is attracting more foreign capital.

With the latest selling, FPI withdrawals from Indian equities in 2026 have reached ₹3.04 lakh crore, significantly higher than the ₹1.66 lakh crore recorded during the entire year 2025, the data noted.

As per experts, factors driving FPI selling include the absence of artificial intelligence-themed stocks and hardening yields in other markets, especially the US, where they can get relatively higher risk-free returns.

SBI Research has also suggested streamlining the repatriation of export proceeds within a reasonable period of around six months, noting that exporters typically extend credit periods of a similar duration to overseas buyers. Any extension beyond this period should be granted on a case-by-case basis, it said.

The measures aim to strengthen foreign currency inflows and improve the stability of India's external accounts. SBI Research said the government should consider policy changes to encourage long-term foreign investment and ensure timely repatriation of export earnings.

Apart from this, the report also said greater clarity on withholding tax (at present 5-20%) for ECBs is needed, chiefly to ensure benefits under DTAA and consistent application of general or specific clauses by authorities, as a confidence-building measure.